If the IRS is chasing you for an outstanding debt, you’re hardly alone. A new GOBankingRates survey of more than 1,000 adults found that nearly one in four Americans owes back taxes.
People fall behind on their taxes for all kinds of reasons, but we spoke with two seasoned professionals who identified the seven most common ways people get into trouble.
Enrolled Agent Reveals 5 Ways That Taxpayers Fall Behind
Lee T. Reams, Sr., is a nationally recognized tax expert and the founder of TaxBuzz. An in-demand industry speaker, he manages his own practice with more than 600 clients and has served on numerous professional boards, including the California Tax Education Council, California State Enrolled Agent Society and the San Fernando Valley Society of Enrolled Agents.
He’s helped countless clients who have fallen behind on their taxes. In most cases, their troubles were due to one of the following five causes.
The simplest yet most destructive way that people get into tax trouble is by neglecting to submit their returns to the IRS.
“In some cases, people simply fail to file their taxes due to various reasons, which can lead to penalties and interest charges,” said Reams.
According to CBS, roughly 5% of taxpayers fail to file every year, often because they’re overwhelmed by the process or object to paying federal taxes.
According to Reams, financial turmoil is the most common cause of tax debt. In some households, there’s simply not enough money left over at the end of the month to keep the IRS at bay.
“Economic challenges, unexpected expenses, or changes in employment status can lead to difficulty in meeting tax obligations,” he said.
According to Reams, some people fall behind on their taxes because they have too much going on, and they prioritize more immediate obligations over settling with the IRS.
“Demands of work, family, and other responsibilities can sometimes lead to procrastination or neglect of tax filing,” he said.
The rise of side hustle culture has more people drawing income from more scattered sources, and losing track of earned money can lead to surprise bills from the IRS.
“Failing to report all sources of income, especially for gig workers or those with multiple jobs, can result in tax discrepancies,” said Reams.
Reams also noted that contract workers must pay the self-employment tax, which pulls the entire 15.3% Medicare and Social Security payroll tax from gig workers, who would otherwise split it with their bosses if they were W2 employees.
The tax code is complex, confusing and always changing. Navigating it can be intimidating and frustrating, and failing to navigate it correctly can lead to surprise bills.
“Some individuals may not fully comprehend tax laws, deductions, or credits, leading to mistakes in their filings,” said Reams. “This is one of the reasons it is so important to work with a tax professional if you have questions or uncertainties regarding your taxes.”
Small Business Tax Pro Keeps Seeing the Same 2 Mistakes
Few people know more about falling behind on their taxes than Neal McSpadden. In 2009, he owed $1.3 million to the IRS, which was garnishing his wages and threatening him with legal action.
The experience led him to pursue a career helping others in his situation, so he apprenticed under a Wall Street tax attorney, became a tax professional himself and founded Tax Sherpa in 2019. After a decade in the industry, he’s processed more than 50,000 tax returns and handled billions in earnings, and his company’s roster includes both enrolled agents and CPAs.
“We see two common reasons people get behind on their taxes,” said McSpadden, who specializes in small business taxes.
“One is small businesses that don’t manage their cash flow well and get caught by surprise at the end of the year,” he said. “The other is employees who under-withhold from their paychecks. This happens with multiple jobs in the household. That could be a married couple where one spouse earns a lot more than the other or with one person holding multiple jobs.”
Reams agrees. He added, “Incorrectly estimating tax withholdings from paychecks can result in a tax debt at the end of the year.”
What You Can Do If You Owe Back Taxes
Proactively avoiding the issue is always the best option.
“As previously noted, it’s crucial for individuals to seek guidance or professional advice to navigate these challenges and ensure compliance on both the state and federal levels,” said Reams. “Once someone gets behind on their tax obligations, it can be more difficult to get caught up than it would have been to tackle the issues head-on in the first place.”
That said, if you do fall behind, here are steps you can take.
The IRS will give you up to 180 days to pay your balance in full if you owe less than $100,000. Keep in mind, however, that you’ll pay interest at the federal short-term rate plus 3%.
If you need more time to pay, the IRS will let qualifying taxpayers set up a long-term plan with monthly payments for up to 72 months. Here, too, you’ll pay the combined principal balance, penalties and interest.
If you can’t pay due to financial hardship, the IRS will consider an offer in compromise, which allows you to settle your debt for less than the full amount owed. There’s no guarantee the agency will accept your offer and you will have to prove you can’t pay.
The IRS is a massive and underfunded agency with a notoriously frustrating bureaucracy. If you’re unable to pay and the agency rejects your offer in compromise, companies like Tax Relief Advocates can negotiate a settlement plan with the IRS on your behalf.
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