Mathematics for Business and Personal Finance

Unit 3: Managing Your Expenses

BusinessWeek Online

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Fear of Filing

Tax time has a way of bringing out our inner demons.

By Amy Feldman

As Apr. 15 looms, tensions between couples mount, bringing long-simmering conflicts to a boil. Procrastination skills kick into high gear. Normally rational people become superstitious about how to do their taxes and when to mail them. People who would never deliberately lend the government money interest-free feel irrationally happy to find they've done just that and are getting a refund.

Of the many strange emotions that surface at tax time, refund mania is perhaps the most common. More than three-quarters of all individual filers last year—105.9 million, out of the 140.2 million total—received refunds, according to IRS statistics. The average refund: $2,324. No one wants to loan the government money, if they think about it. But as one blogger who goes by the name "it's just money" wrote of his joy at getting a refund: "I was just giving Uncle Sam an interest-free loan of over $2,400 for over a year!...yet, knowing this, when TurboTax tells me: ‘Refund: $2,412,' the immediate reaction in me is: ‘Yippee!'"

John Battaglia, director of private-client advisers at Deloitte and a tax preparer for more than 20 years, sees refund mania up close and personal. He has always chosen to pay a little in taxes at tax time, but his wife wants to know: "Why did we owe when everyone else gets a refund?" he says. "She gets on my case every year. I might have to change my W-4."

Sometimes even the prospect of a refund can't get taxpayers to file on time. Last year, more than 10.2 million taxpayers requested the automatic six-month extension for filing returns. While some late filers have good reason, most fall victim to what Hersh Shefrin, a behavioral finance professor at Santa Clara University, calls the planning fallacy: We think we can get more done than we actually can. "I'm prone to it," Shefrin admits, so he finds ways to force himself not to fall into that trap. "I put on the calendar which weekend I'm going to be working to get my taxes done, and I make an appointment with an accountant because I'd expose myself to embarrassment if I had to cancel. I don't take pride in this behavior, but you want to be vigilant for where you are vulnerable so that you don't get overconfident about your gremlins."

A Couple's Compromise

Differing styles of dealing with taxes can cause strain in a marriage. Laura Ricci and David West of Pewaukee, Wis., faced all sorts of tax issues when they married (her second, his third): two businesses, kids, a new home, and very different ways of approaching Apr. 15.

Ricci, who does her own taxes and has faced down IRS audits, wanted to do everything by the book. West, 54, who had recently set up his own business building transmissions for vintage muscle cars, called Davids4Speeds, was hearing from friends that he should keep the business under the table to avoid record-keeping hassles. "I was intimidated by the process," West says. "Most of us gear heads are very good working with our hands, but not so good working with papers." Says Ricci, who is 52 and runs a consulting business with a lot of government clients: "My perspective was that I didn't want to marry someone who might become a felon."

They struck a compromise: His business is on the books, and she does all the taxes for him with off-the-shelf software. To minimize tax anxiety, she asks her husband to document everything, and she completes the returns many weeks early. "I have a theory that when I do my tax returns early they don't get as much scrutiny as [the returns of] the folks who drive up to the post office on Apr. 15," Ricci says, laughing.

Emotional Land Mine

Some taxpayers don't even want to share their tax situation with a spouse. David Bergstein, an accountant and an analyst at tax advisory firm CCH, recalls one extreme example. A couple was drawing up a prenuptial agreement. The soon-to-be husband wanted a clause that said his wife was not entitled to see his tax return. "He didn't want her to know how many millions he had," Bergstein says. The clause ended up being stricken from the agreement.

Not only do couples often have different approaches to doing taxes, they often have an inability to talk rationally about them, says Ruth Hayden, a financial consultant in St.Paul, Minn. They fight about deductions and record-keeping, but the underlying tensions are about deeper issues like power, control, and fairness.

One scenario she sees frequently: couples where one spouse wants the accountant to figure out who's responsible for how much of the tax bill. One self-employed woman, Hayden says, threatened her husband, also self-employed, with filing separately until she saw an analysis of their respective tax burdens. "She said she was tired of paying for his taxes...underneath that is a bigger issue about what is fair," Hayden says. "He thought she was being cheap."

Also common are clients who go into denial at the sight of an IRS letter. One man, an accomplished attorney, came to Hayden's office with a letter he'd received a month and a half earlier but hadn't opened. When he dropped the bombshell casually at the end of their meeting, his wife sat there with a puzzled expression on her face, Hayden says—he'd never told her about the letter. "She just looked floored," Hayden says. Fortunately, it contained a small bill related to an earlier year's taxes that could easily be fixed.

Small denials can spiral into big denials. Dennis Brager, a tax attorney in Los Angeles whose clients have racked up six-figure tax liabilities, often gets referrals from divorce attorneys. "The attorney will say, ‘You need to list your assets and liabilities,' and all of a sudden one party will say, ‘There are tax returns that haven't been filed for five years.' And the other one goes: ‘Whaaaat?'" Brager says.

Think of that as denial taken to a new extreme—the inability even to file for an extension—combined with extreme marital discord. "These people wind up saying to themselves, ‘I am so overwhelmed by not being able to pay my taxes that I cannot do anything, let alone admit to the IRS that this is what I owe," says behavioral finance professor Shefrin. "They engage in true acts of delusion by not filing."