The Well-Traveled Roads Leading to IRS Debt
Avoid These Common Tax Debt Traps
Finding yourself in tax debt with the IRS is no laughing matter. That’s why it’s important to avoid all roads and bridges that lead to it.
Americans get into debt with the IRS for all sorts of reasons. Some don’t have the time to do their taxes, others just don’t pay what they owe, and a small tax debt spirals into a tax debt mother lode because of all the IRS interest and penalties. While falling into a tax debt trap happens, the trick is to work with a tax professional and avoid it.
One way people find themselves in debt with the IRS is by just not filing their tax returns. Everyone has to file taxes. As the old saying goes, death and taxes are as certain as the sun rising in the morning. For those under 65, single filers have to file a tax return if your income is at least $10,000. Head of households making less than $12,850 also have to file, and married couples younger than 65 filing jointly have to file tax returns if they make less than $20,000.
Some of the most common tax debtors are entrepreneurs and business owners. Because they’re self-employed, they’re responsible for their own tax burden by paying what are called estimated tax payments. Typically, their taxes are paid every month or every quarter, but sometimes mistakes are made and the payments can be too small or they’re just not made throughout the year.
If that happens, the resulting end-of-year tax bill will be big. But working with a tax professional helps prevent a large April surprise.
Others fall into tax debt by ignoring their IRS tax debt. Even if you can’t pay your back tax debt, ignoring it isn’t the best – and smartest – option. Ignoring tax debt will preclude you from reaching a manageable IRS compromise or payment plan. Also, the IRS interest and penalties only make a bad situation worse. There’s multiple options for paying down tax debt when you’re in dire straits, so make sure to work with a tax professional to avoid a worse alternative.
People can also find themselves in tax debt because of their boss. Employers normally withhold a bit of their employee’s paychecks for tax purposes. But if they don’t withhold enough, the employee will owe the rest to the IRS and fall into back tax debt. It’s called “underwithholding,” and happens when employees claim too many exemptions. Filing a new W-4 can usually fix this.
Your best bet to steer clear of the troubled waters of the IRS is to pay your taxes.