DIFFICULT MORAL QUESTIONS
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Question 173: Must a person pay tax on past income unreported by an honest mistake?
For many years I ran my own business. Eight years ago I sold it, and have enjoyed a quite profitable second career as a management consultant to several companies. To maintain adequate health coverage and get certain other benefits, I have arranged to be on the payroll of at least one, rather than contracting with all of them for my services.
Recently I discovered that several years ago my accountant did not include in my tax return a substantial amount of income (about twenty-five thousand dollars); through no fault of mine, the W–2 form supplied by my employer did not include it, since the company’s accounting department mistakenly classified it as a contract payment. I asked my accountant what to do, and he said there is no need to report that income now, because it was the employer’s responsibility to include it with other compensation. He also said that, if the mistake was ever going to be caught, it certainly would have been caught by now. A second accountant also advises me against filing an amended return, saying that might well lead to my being unfairly treated by the government. I might be compelled to pay a large sum in interest and penalties, and my returns for past and future years might be subjected to close examination.
What do I do now? Must I file an amended return or, perhaps, make up for the underpayment in future years, for instance, by forgoing deductions allowed by law until the tax that would have been due has been paid? Or may I proceed as if I never noticed the mistake? That is what I would prefer because, while I realize that we should render to Caesar what is his, I would rather not pay our Caesar—the IRS—a dime more than I must.
Analysis:
This question calls for application of the norm requiring payment of taxes. Unless the law provides otherwise, the questioner still owes the tax and should pay it. Even if the first accountant’s risk assessment is accurate, his advice is not morally sound. Even if the prospective consequences of filing an amended return justified not doing so, the questioner could and should pay the full tax, together with the applicable interest, in another way. Still, people who faultlessly fail to pay taxes when due are not held to make payments beyond those required by law.
The reply could be along the following lines:
Many people regard taxes as a burdensome imposition whose justification, if any, is barely intelligible. On that view, overlooking taxable income is a fortunate mistake that hardly calls for rectification. However, material resources are necessary to protect and promote the common good, and loyal citizens should willingly contribute their fair share (see LCL, 894–97). Therefore, one ought to render to Caesar what one owes whether he can exact it or not.
Even granting your good faith in overlooking the tax due on the twenty-five thousand dollars, you still must pay the government whatever you owe. The tax laws provide that, if noticed within a certain number of years, even entirely honest mistakes involving no negligence are to be corrected when that will be to the government’s advantage (and may be corrected if to the taxpayer’s advantage). Of course, if the amount due were very small, one might judge uprightly that the cost to the government of processing an amended return, as well as the trouble to oneself in preparing and submitting it, justified not filing it. However, for the amount of tax undoubtedly involved in your case, just as you surely would file an amended return if you had overpaid your taxes, so you should be prepared to do the same to fulfill your civic duty. So, unless the period specified by law has expired, you would be violating your present obligation to pay taxes by proceeding as if you had not noticed the mistake.
Of course, even if the period specified by law has not expired, the accountant might be correct in saying that, if the error were ever going to be caught, it probably would have been caught by now; but in that case the advice that there is no need now to report the income reflects only a shrewd observation about likely consequences while ignoring truly prudent considerations about moral responsibility. Then too, if you are prosperous enough not to notice that so large an amount of taxable income was not taxed, you are hardly likely to suffer undue hardship if you now pay the additional tax including any appropriate interest and penalties.
Assuming that you should pay, how you ought to make the payment is a secondary question. The second accountant may well be exaggerating the chances of your being treated unfairly by the government if you file an amended return. But even if the second accountant’s advice is sound, failing to file an amended return when appropriate to correct an underpayment of which one becomes aware violates the law, and it seems to me you would need a ground far more substantial than either accountant has offered to justify such a violation. If you nevertheless judge that you have a serious enough reason to make up for the underpayment in another way (for example, by forgoing allowable deductions in future years), you should be careful not to pay less than you owe (for example, by neglecting the interest and penalties that would be charged if you filed an amended return). The law is not unfair in specifying additional charges when taxes are not paid when due.
Does it follow that a person who by mistake has underpaid taxes never can be morally justified in not paying them? No. One can imagine a case in which the period set by law for correcting innocent mistakes has expired, and the mistake was entirely honest and in no way due to negligence—may indeed have been due to bad advice from the revenue service itself or from an expert whose guidance was reasonably accepted and followed. In such a case, a conscientious taxpayer has no legal duty to pay the tax and so can rest easy without paying it.
Finally, not violating the commandments is good, but, as Jesus told the rich young man, we are called to go beyond keeping the commandments.384 Though, I do not blame you for wishing to give Caesar no more than is his, you also must give God what is his, and while what is Caesar’s is limited, what is God’s is not, for it includes what is Caesar’s and all else too. So, having responded to the question you asked, I wish to call your attention to a prior question and make a suggestion.
Do you really need all the income you earn as a management consultant? Many owners of small businesses struggling to achieve or maintain profitability could benefit from the advice of a person with your expertise, but probably few could afford your fees. Consider spending at least part of your time helping struggling small businesses. You might offer your service without charge or, perhaps better, charge only a modest fee, contingent on future profits, if any. In any case, if you do not need all your income and yet choose not to forgo earning it, you cannot justify amassing ever increasing wealth. Rather, you should use your surplus income to help others, either by giving money to people in need or in some other way. Indeed, you would be wise to go further than justice requires in helping the poor, even to the point of impoverishing yourself, for in that way you would store up “an unfailing treasure in heaven, where no thief comes near and no moth destroys” (Lk 12.33).
384. See John Paul II, Veritatis splendor, 16–21, AAS 85 (1993) 1146–50, OR, 6 Oct. 1993, iii–iv.