I do know that in the US, bank-account interests are taxable as passive incomes, but what I don't understand is the point of filing tax returns on bank account interests, since the government (or the IRS), or whatever, has access to bank accounts and can directly deduct taxes (not seizing, I'm not talking about unpaid taxes or fraud istances), without henceforth requiring a tax return filing, since they could deduct the money themselves.
1 Answer
The "point" of including bank-interest income on your tax return rather than having the government automatically deduct what it feels that you would owe is that the government is not legally empowered to take money away from you in that fashion. The government is legal empowered to compel you to pay your taxes, and there are numerous rules enacted as law or as a consequence of laws passed. You can read the various relevant laws here. There simply is no general law that says that banks must withhold taxes on interest. There might be a specific case when an entity is subject to backup withholding (as a response to a taxpayer not following certain rules). There are also special rules regarding non-resident alien withholding, which could require interest withholding. Apart from the intrinsic political unpopularity of imposing new withholding requirements on people, it is difficult to compute the correct amount to withhold, since not all interest is taxable. In theory, a set of rules could be constructed to require withholding of interest income, if Congress were to pass a law similar to 26 USC 3402.
answered Nov 17, 2019 at 18:19
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So in this case I have to withdraw the amount of money from the bank account and then pay the bill to the IRS, right?– abdulNov 17, 2019 at 18:22
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Sort of: it depends on how much cash you have and what the tax liability is, but the law is that you have to find the money somewhere. It's not really a "bill", since you also have to figure out what you owe. You could end up with a bill if they conclude that you did the calculations wrong.– user6726Nov 17, 2019 at 18:38
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Aaaah so the IRS doesn't tell how much should be paid, right? It's weirder than I thought.– abdulNov 17, 2019 at 18:40
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2@abdul "It's strange because the IRS knows at the beginning how a person has earned": they don't necessarily know everything about all sources of income. For example, if you are teaching basket weaving in your living room and being paid in cash, they won't know about that. They also don't know about the deductions you're entitled to unless you tell them (for example, charitable contributions). The rate of taxation depends on the amount of income, after these deductions, so they cannot know exactly how much tax you owe before you submit the tax return.– phoogNov 17, 2019 at 23:04
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1@abdul right, many people lie about unreported income, and sometimes they are audited, which generally leads to interest charges and late payment penalties if the unreported income is discovered. It can also lead to criminal prosecution. Regardless of that, the principle that the IRS cannot know the taxpayer's tax until the taxpayer files a tax return remains, because there are other things such as deductions and exemptions that the IRS doesn't know about unless the taxpayer tells them.– phoogNov 18, 2019 at 21:51