Trouble with the IRS is an affliction of the young.
A new GOBankingRates survey of more than 1,000 people found that Gen Z is far more likely than older demographics to owe outstanding tax debt — and the older you get, the less you’re likely to owe.
Here’s a look at Gen Z’s debt to the Taxman with expert insight on why some groups owe more than others.
Tax Debt Subsides With Age
The study found that, overall, only one in four Americans owes back taxes to the IRS. But for the youngest adults, it’s more like half.
An even 50% of 18-24-year-olds have outstanding tax debt, the highest of any age group by far. For context, about 73% of young millennials ages 25 to 34 are free and clear, likewise for 78% of those ages 35 to 44.
Gen X and the baby boomers are doing even better.
More than 84% of 45-54-year-olds don’t have any tax debt, and the same goes for roughly nine out of 10 older adults 55 and up.
Like all demographics, the Gen Zers who do have outstanding tax debts are most likely to owe less than $1,000 or $1,000 to $5,000, but about 10% have big bills of $5,000-$10,000 or even higher into the five figures. Virtually no one age 55 or older struggles with such significant tabs hanging over their heads.
Gen Z Is New to the Game and Learning From Their Mistakes
Many Gen Zers are filing their tax returns for the first time or have little experience with filing. As veterans of the experience know, the process can be complex, convoluted and confusing. It’s likely that many newbies owe back taxes because they made rookie errors, didn’t take the process seriously, didn’t leave sufficient time or simply blew it off.
“Gen Zers’ higher likelihood of owing back taxes can be attributed to a combination of factors,” said TaxBuzz founder Lee T. Reams, Sr., a nationally recognized tax expert who 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. “This generation is relatively new to navigating the complexities of the tax system. They might not fully understand the importance of timely filings and estimated tax payments.”
Neal McSpadden, small business tax expert and founder of Tax Sherpa, agrees. “Younger people are more likely to get into tax trouble just due to lack of experience,” he said. “Nobody is taught how the tax system works in school. So young people who are just entering the work world don’t understand how withholding works, how doing gig work can impact your overall tax situation, or how tax on stock trading works.
Gen Z is Generation Side Hustle — And Gig Work Complicates Taxes
McSpadden mentioned gig work, which also probably contributes to Gen Z’s penchant for piling up past-due tax bills. The IRS and many top software providers offer free tax filing services, but only for simple returns for W2 wage earners — that’s because filing for 1099 contract work is anything but simple, and novices are much more likely to stumble through the process.
“One major component is the prevalence of side hustles among this generation,” said Reams. “Many Gen Zers engage in gig work, freelance jobs, or entrepreneurial ventures — either on a full-time basis or in addition to a traditional 9-5 — which often leads to irregular income streams. This can result in difficulties in accurately estimating and reporting their earnings, leading to tax discrepancies. Moreover, some taxpayers in this age group may inadvertently overlook certain income sources, such as social media content creation, further contributing to discrepancies in their tax filings.”
Jake Hill, CEO of DebtHammer Relief, sees it all the time — ambitious young adults pursue side gigs to make more money, only to lose it to expensive tax errors. “Gen Z is far more likely to engage in side hustles, and many are unaware of the tax implications that accompany multiple income streams,” he said. “For example, many do not realize that they must claim all of their income, regardless of how much they make from each individual side hustle. Since the tax filing process isn’t very intuitive, this generation can feel overwhelmed when trying to complete this process themselves.”
What You Can Do if You Owe Back Taxes
If you owe back taxes, the worst thing you can do is nothing. The IRS does not go away, and interest, late fees, failure-to-file fees and other penalties can rapidly snowball and turn a small problem into a big one faster than you might think. Moreover, the IRS can pursue extraordinary collection measures that credit card providers and other lenders cannot, including wage garnishment.
File Immediately and Pay Whatever You Can
If you haven’t filed your returns, the IRS’s failure-to-file penalty will cost you 5% of your outstanding taxes for every month or partial month that a return is late up to 25% of your unpaid bill. Then, at least, you’ll be dealing only with the much more forgiving 0.5% failure to pay penalty. By paying as much as you can right away, you’ll reduce the amount of debt that’s accruing interest, which the IRS charges at the federal short-term rate plus 3%.
Seek an Extension
If you owe less than $100,000, the IRS will give you up to 180 days to pay your balance in full. No monthly payments are required as long as you settle up by the extension deadline, but it’s wise to pay as you go because the more you lower the balance, the less cumulative interest you’ll pay.
Request an Installment Agreement
The IRS allows qualifying taxpayers to enter long-term payment plans for up to 72 months. Your back taxes must not exceed $50,000 to qualify.
Ask the IRS for a Hardship Compromise
If financial hardship leaves you unable to pay your back taxes, you can propose what’s called an offer in compromise to the IRS. If the agency accepts, you can settle your debt for less than the full amount you owe. However, proving hardship can be difficult and there’s no assurance that the IRS will agree.
Seek Assistance in Negotiating With the IRS
If you can’t pay what you owe in back taxes, don’t be surprised if you find it difficult to negotiate with the IRS or even to get a person on the phone. Going it alone can be a challenge, so consider enlisting the help of a company like the Tax Hardship Center, Blueprint Tax Resolution Services and Tax Relief Advocates, which can negotiate with the IRS on your behalf to reduce your bill.
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