Well, 48 pennies.
Most tax software rounds off numbers to whole dollars. Indeed, the IRS suggests taxpayers do this in their instructions to Form 1040: “You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.” This seems fairly straightforward, no?
Well, most of the time it does. But what happens when a taxpayer makes an installment plan agreement, and pays what’s due, but rounds what he owes to whole dollars? In the case decided by the Tax Court, a taxpayer agreed to make two payments of $13,348.24. He made the payments on the dates agreed to, but rounded his payments to the nearest whole dollar (two payments of $13,348.00). The IRS sent a notice of delinquency—the taxpayer owed 48¢ in taxes plus a penalty of $175.44 and interest of $264.08. After a Collection Due Process Hearing that apparently went nowhere, the case ended up in Tax Court.
I am not making this up.
I wonder whether anyone at the IRS can explain why you would spend several hours attempting to collect 48¢. As the Tax Court notes, “We must decide this dispute even though the cost of the parties’ pursuit of their principles will far exceed the amount in dispute.” There are, after all, plenty of taxpayers who abuse the system, for amounts that are thoursands (and millions) of times larger than 48¢. If you get the feeling that I think the IRS made “a colossal blunder” (as the taxpayer in this case put it), you’re correct. But I digress.
The taxpayer had his records showing payment was made in the amount agreed to, and that he used a method that the IRS endorsed. The IRS, on the other hand, “…presented no evidence showing that penalties and interest accrued in excess of the amount petitioner paid.”
The Tax Court found that “…it was an abuse of discretion to proceed with collection activities.”
Case: Norris v. Commissioner, T.C. Memo 2005-237