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Article by Mohan Babu


Paying one’s income tax dues to Uncle Sam

In the first of his fortnightly series on ‘Working Abroad’, Mohan Babu focuses on the filing of income tax returns in the US and the efficiency with which the Internal Revenue System (IRS) goes about enforcing the tax code

Living and working in the US, the inevitability of Benjamin Franklin’s oft repeated quote does not elude me. This is especially true during this time of the year when tax mania generally sweeps across the country. As the April 16th deadline for filing taxes approaches people scramble to find the required forms, software and/or tax practitioners. In case you are wondering, Uncle Sam’s reach extends to everyone living and making money in the US, including NRIs and those on H1 Visas.

The US Government, like most governments around the world, levies a tax on income earned by most people living and earning there. The tax collection process has been turned into a well-oiled machinery. In the four years that I have been in the US, I have not ceased to be amazed at the efficiency with which the Internal Revenue System (IRS) goes about enforcing the tax code. People are acutely aware of their fiscal obligation towards the Government, if only for the lure of ‘refunds’ that may be due to them. Every year IRS embarks on a major PR campaign to educate and inform the public of their fiscal responsibility.

Income taxes in the US are of different kinds. Almost everyone has to pay the federal (central) income taxes. Depending on where one lives, state, county and city taxes will also apply. Along with the taxes, other surcharges like Social Security, Medicare etc are added to one’s federal tax and an average person will end up seeing almost 30 percent of the earnings going to Uncle Sam. Most of the income tax is deducted at source. Employers deduct a percentage of the salary that is due to the various government bodies before disbursing the net amount to the employee. At the end of every year, it is the responsibility of the taxpayer to compute the actual tax that was due. If an excess amount was withheld, the taxpayer will be eligible for a refund, otherwise, he will have to pay the residual taxes.

Apart from their regular income, most people will have other incomes coming in from bank interest and dividends, profits and losses from trading stocks. These incomes are generally added to the gross income on which taxes are due. The government gives tax breaks for medical expenses, donations to charities, savings for retirement, interest on home-loan mortgages. Most of the income and deductions are tracked by the banks and financial institutions, which report them to IRS. People generally sit with their tax filing forms during weekends preceding the April deadline. There are a number of tax software packages available that speed up the process of computation, filling forms and can even be used to electronically file the tax returns to the IRS.

With huge databases and computer systems developed decades ago, IRS is able to track and process income tax filings with amazing efficiency. In spite of what the media says, the system works. Their systems are constantly being updated and most individual tax filers are able (and encouraged) to file their taxes electronically. State governments have also jumped on to the electronic bandwagon and allow for income tax filings over the Web. Being a bit of an early bird, I electronically filed my state and federal taxes towards the end of February and received my tax refund in my bank account in less than 10 days.

What happens if you do not file taxes? Most people do not even want to imagine the consequences. Fear of IRS has reached mythical proportions and is a butt of Talk Show jokes, especially during this time of the year. One thing is certain, big brother is watching. Case in point, along with a few friends, I ‘founded’ a Limited Liability Company in Colorado sometime last year. We went ahead and got a tax ID because it was required for us to open a corporate bank account. During January, along with all my other tax documents, I received a letter from IRS reminding me to file the tax returns for the company by April 16th! The ‘archaic’ IRS system was smart enough to realize that a new company was operating in Colorado and that it had to file its tax returns along with every one else.

The flip side of all this is that the government is able to generate a lot of money. Almost 30 to 35 percent of earnings - from millions of its citizens and foreign workers add up to billions of dollars. That money is used to build roads, for education, public services, libraries and to provide good clean water and basic amenities to everyone.
Fast forward to a world 8,000 miles away - India. Maybe it is my idealistic wishful thinking, but just imagine if we could replicate the same tax collection process in India. Bring our Income Tax (IT) systems up to speed, help enforcement of tax filing. If the IT systems (pun intended) at the department are built with intelligence to help us target even half of the top fifty percentile of income earners in India and ensure that they file their taxes accurately and on time. How many billion rupees will that bring into our coffers? How many people can we feed, educate and export as IT professionals? IT helping IT...





About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    For FAQ, Trivia and Information on Life in America, visit the Ask-A-Desi section

    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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