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The Consequences of Insufficient Household Income

This new Consequences of Insufficient Household Income report provides a deeper level of understanding of the choices that ALICE and poverty-level families across the country make when they do not have enough income or assistance to afford basic necessities, and the consequences of those choices.

their income.

their income. The misreporting of individual business income and related self-employment taxes accounts for more than 42 percent ($194 billion) of the taxes owed in a given year that are not paid voluntarily and in a timely manner (Bruckner, 2016). Consequences Short- and long-term financial penalties: Late payment, nonpayment, or mistakes or misrepresentations on tax forms all carry financial penalties. When taxpayers are audited by the IRS, they take on additional costs including hiring a skilled tax preparation professional, paying fees, and paying interest on taxes owed, dating from the day their return was due. Accidental or deliberate mistakes on tax forms can carry penalties of between 20 and 40 percent of the amount by which taxes were underestimated. In addition, unpaid taxes can damage one’s credit score. Tax evasion, or refusal to pay taxes, is a felony carrying up to a five-year prison sentence and/or fines of up to $250,000 (Lorette, 2016; Internal Revenue Service, 2016; Internal Revenue Service, 2016a; Lazarony, 2016). Lack of financial protections in contract and freelance work: Tax avoidance in some cases may increase the attraction of contract and freelance work, moving more workers into arrangements that lack standard supports and protections such as disability insurance or workplace safety regulations. The absence of those protections can leave workers susceptible to other problems in the future (Johnson, 2016; Strom & Schmitt, 2016). BROADER COSTS OF UNPAID TAXES When ALICE workers cannot pay their taxes, not only do they face a range of penalties, but the wider community must cover the monetary gap. According to the Government Accountability Office (U.S. GAO), at the end of fiscal year 2011, individuals owed a total of $258 billion in federal unpaid tax debts. When taxes go unpaid, the rest of the community must pay more to cover both the shortfall and the cost of collection efforts (U.S. Government Accountability Office (U.S. GAO), 2012; Bruckner, 2016). FUTURE TRENDS: TAXING ALICE FAMILIES Besides the cost of household basics and the level of current wages, the tax code is another factor in the evaluation of economic inequality. According to the Federal Reserve, federal taxes help make after-tax income more equal, while state taxes make it less equal (Institute on Taxation and Economic Policy (ITEP), 2015). Reductions in state tax rates – for income tax, sales tax, or payroll taxes – could increase the income ALICE families have to afford the basic Household Survival Budget. In addition, changes in the tax structure could reduce inequality between income groups. The opportunity to avoid paying taxes will increase as the gig economy grows. More than 2.5 million U.S. taxpayers are participating in the on-demand platform economy every year, and that number is set to more than double in the next few years. As family budgets get tighter, there will also be pressure to cut corners where possible. A tax code and enforcement system not designed to capture these tax liabilities will make it easier for workers to avoid taxes in the future (Bruckner, 2016). 80 UNITED WAY ALICE REPORT – THE CONSEQUENCES OF INSUFFICIENT HOUSEHOLD INCOME

UNITED WAY ALICE REPORT – THE CONSEQUENCES OF INSUFFICIENT HOUSEHOLD INCOME 81

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