Margee Fagelson lost her first dot-com job last year when Ingredients.com went belly up in February. That was followed by the shutdown of Virtual Communities, which had hired her as a consultant, and VSlash, which went poof before paying her a $3,000 consulting fee.
Now, the Internet meltdown has visited a final indignity upon the 35-year-old New York music media consultant: With less than a month to go until tax day, two of these former employers haven't sent Fagelson the forms she needs to file her return.
Of the more than 210 dot-coms that choked to death on the "new economy" last year, many simply boxed up their records and walked away from the wreckage.
That has presented Fagelson and possibly thousands of other dot-com casualties with an intriguing dilemma: to pay or not to pay their taxes.
Legally, of course, there is no choice; income taxes must be paid. Even if companies flout the law by failing to make tax information available to employees and contractors, the workers are expected to calculate their tax bills based on pay stubs, invoices, bank records or even memory. Those who don't pay face hefty fines or even prison -- if they get caught.
So Fagelson could spend dozens of potentially fruitless hours tracking down her former bosses. Or, following the proud tradition of Internet entrepreneurs who profited by casting aside traditional rules of business, she could take advantage of the missing documents and reduce her tax bill.
"I think about this all the time," said an exasperated Fagelson, who is practically broke and isn't sure where she'll find the money to pay any of her taxes that weren't already withheld. "I don't want to get thrown in jail. But it's like it's only illegal if you get caught, and I think my chances of getting caught are slim to none."
After a year that transmogrified hundreds of Internet companies from stock-market darlings to profitless pariahs, Fagelson's predicament is hardly unusual. Between 12,000 to 15,000 workers lost their jobs last year as a result of dot-com closures, according to Webmergers.com, a research firm that tracks Internet mergers and acquisitions.
Those who have a tax refund coming from their undocumented income will clearly want to report all of it to the government. But for workers who think they still owe taxes, the incentive to cheat is powerful.
No one knows exactly how many people failed to receive their tax forms from last year. But experts say that failing companies are always looking for ways to cut corners, and that the accountants and payroll firms that prepare W2s for employees and 1099s for independent contractors often end up on the chopping block.
Although thousands of companies fail each year, what distinguished 2000 was the speed with which the dot-coms disappeared, some giving only a few hours' notice to employees. That significantly decreased the chances of a company taking care of some of the little details of death, such as filing tax forms.
A W2 states how much money was paid to an employee over the course of a year, along with the amount of money withheld for federal income, Social Security and other taxes. Companies are supposed to issue a 1099 to document payments to independent contractors whenever they pay a self-employed individual $600 or more in a year. Companies must make W2s and 1099s available to their employees and contractors by Jan. 31.
If companies fail to provide the information, there is little the Internal Revenue Service can do. The burden falls on workers to reconstruct their income themselves. It is a relatively easy process for those who have bothered to save their pay stubs.
The IRS does not keep track of how many people file their taxes without their W2s or 1099s, or how often companies shut down without sending out the necessary tax forms. However, IRS spokesman Larry Wright said that in his 25 years with the federal tax agency, he has noticed that the number of people filing without their W2s increases when the economy weakens.
For some dot-com refugees who have suffered through multiple layoffs and long periods of unemployment, the economy now looks so weakened that scamming a few dollars from the government is sorely tempting.
The situation is further complicated by the huge gains made by some workers from stock options back when the market was hot. Many now face enormous income or capital-gains tax bills and have no cash to pay them.
James C. Counts II, a Hemet, Calif., accountant who specializes in serving small companies, said that if neither a company nor a worker reports income to the IRS, tax collectors are "not likely to find out about it."
But others caution that there are myriad ways the government could discover hidden income, such as in a divorce proceeding or if the company's principals are audited.
People who try to conceal income from the IRS "are flirting with disaster," said David Flamer, a Los Angeles accountant and small-business consultant. "Sooner or later, it's going to be trouble."
The IRS generally has three years to catch scofflaws, but the statute of limitations rises to six years if someone fails to report 25 percent or more of their income, said Karen Goodfriend, a certified public accountant and personal financial specialist at GoldsteinEnright Financial Advisors in Menlo Park, Calif. Fines can be as high as 75 percent of the unpaid taxes, plus interest. Tax cheats are rarely sent to the slammer, but the worst offenders can face a five-year prison term and a fine of up to $100,000 for each offense, according to the IRS. .
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