According to the latest Internal Revenue Service Data Book, there were approximately 14 million delinquent tax accounts at the end of 2016. The total associated tax balances for those accounts, including the assessed balance, penalties and interest equaled a staggering $138.2 billion! So why do so many people fall behind on their taxes? We’ve probably heard every reason under the sun from “I got scared” to “I just forgot to file.” However, most reasons will typically fall into 4 broad categories.
When you work a job, you’ll typically tell the employer to withhold taxes from your paycheck. However, if enough taxes aren’t withheld from your paycheck throughout the year, you, the employee, will likely owe the IRS when you file your tax return. The IRS refers to this phenomenon as “underwithholding.” It’s usually triggered when an employee claims excessive exemptions on his or her IRS Form W-4 that results in not having enough income tax withheld throughout the year. We sometimes also see this when an employee tries to get too much money in their check by claiming “exempt” on their W4 and either 1) becoming too accustomed to those nice take home checks or 2) they forget to switch it back before the year ends.
The main takeaway with underwitholding is to know that you can file a new W-4 at any time. What’s even better is that if you find that you’ve given too much to the government, you’ll get the money back when you file your income tax return!
Not Making Estimated Tax Payments
In this post, we talk about the groups of people that tend to have the most IRS debt. Essentially, those who are self-employed do not have an employer to withhold taxes from their paycheck. Thus, they are responsible for paying their own taxes on a quarterly basis via the estimated tax payment process. But if you fail to make your estimated tax payments throughout the year (or contribute enough), you’ll likely incur a large tax liability at the end of the year. All it takes is one or two years of not paying enough on your taxes as a “sole-proprietor” and your tax debt can very quickly get out of control.
Life Events or Disruption
Sometimes life simply gets in the way of one filing their taxes. A death in the family, illness, cancer, divorce, or a loss of job can all keep a person from performing their normal compliance requirements. The main thing to remember is that once that disruption has passed, it is best for one to get compliant and file their missing returns as soon as possible.
This is pretty much the catch all for everything else ranging from “fear” to thinking that one did not have a filing requirement. We’ve seen instances where a taxpayer falls behind with filing a year or two. Then because of “fear” they decide to not file going forward. We’ve seen people who sometimes have not filed for 5, 10 even 20 years! Conversely, some taxpayers don’t file a return because they didn’t think they needed to when it turns out they did. For example, we had one taxpayer who knew they didn’t have to file a tax return with the state because their sole source of income was from retirment sources (which weren’t taxed by the state). But unfortunately, they took this to mean that they did’t have to file with the IRS as well. So they didn’t…for 8 years. Needless to say, this turned into a $60K+ tax debt. It was eventually resolved, but not without a lot of work and we’re sure some very sleepless nights!
People fall behind on their taxes. If the IRS thinks you owe them money, they will try and get your attention with a few letters, maybe a phone call or possibly a visit to your job or home. If those things don’t work, then they will take enforced collection action which can include liens, levies, garnishments and the like.
Our suggestion? Try your best to not owe the IRS in the first place. Focus on being self-motivated/proactive and educate yourself on your tax reporting and payment obligations. If you are unsure about them, get a hold of a tax attorney, CPA, Enrolled Agent, professional tax preparer or even the IRS itself.
What if it’s too late and you already owe the IRS? Reach out to the same folks listed above (including us of course) and ask them how you can become compliant ASAP!