According to the most current Internal Revenue Service statistics, Americans owed more than $114 billion in overdue taxes, penalties, and interest in 2020. Clearly, despite the prospect of harsh fines, asset confiscation, and even prison time, millions of people continue to owe taxes.
- Working Americans are obliged to submit income tax forms with the IRS each year, disclosing their total income from employment as well as other activities such as investments.
- Every year, millions of taxpayers are discovered to have under-reported their income or due taxes, resulting in billions of dollars in back taxes, interest, and penalties.
- Simple errors, such as submitting late or making errors in tax computations, may be avoided with thorough scrutiny and preparation.
- Other motives are more sinister. Failure to submit taxable income may result in prison time as well as monetary fines in serious and intentional situations.
People get behind on their taxes for a variety of reasons, according to Daniel Morris, a certified public accountant (CPA) at Morris + D’Angelo, a Silicon Valley-based accounting business. Morris continues:
There’s the “I’m too busy excuse,” where the person’s life is out of control and was simply too overwhelmed to complete the paperwork. Typically, that person believes they will get to it next week.” Then there’s the life disruption excuse, which has more validity. There could be a death, illness, cancer, divorce, or a loss of job that derailed them from performing their normal compliance requirements.
According to Harlan Levinson, a CPA in Los Angeles, he receives countless inquiries each year about late tax payments, both personally and for businesses:
The reasons are myriad. Some people say they didn’t feel like opening the mail, or they don’t have the time to do their taxes…Then there’s the Americans who just don’t have the money to pay their taxes, or who are overwhelmed by the whole tax filing process.
If you fall behind on your taxes for reasons other than financial difficulty, you should reconsider your tax payment options. The cost of inaction is too great; the IRS will come after you and will not let up until you pay up.
Here’s a more detailed list of reasons why normally responsible individuals fall behind on their taxes.
Failure to File
Failure to submit a tax return is one of the most frequent blunders a taxpayer may make. However, if you reside and earn income in the United States in excess of a certain amount during a given year, you must pay taxes and disclose that income by submitting a federal tax return.
The IRS utilizes three factors to determine whether you must submit a return: your age, your filing status, and your income. In general, the law mandates you to file whenever you exceed a specific income level. The sums are adjusted for inflation each year.
Individuals under the age of 65 must submit a tax return for the 2020 tax year if they earn at least:
- $12,400 as single filers.
- $18,650 as the head of the household filers
- $24,800 for married couples filing jointly who are both under the age of 65.
Individuals 65 and older have a somewhat higher earnings threshold:
- $14,050 for single filers
- $20,300 for filers who are the head of the household
- $26,100 for married couples filing jointly with one spouse over the age of 65.
- $27,400 for married couples filing jointly who are both 65 or older.
Employers are required by law to deduct taxes from your payment. What you may not realize is that if sufficient taxes are not withheld from your paycheck throughout the year, you, the employee, will almost certainly owe the IRS when you submit your tax return during tax season. This is sometimes referred to as “under-withholding.”
It generally occurs when an employee claims too many exemptions on an IRS Form W-4 (completed at the time of hiring).This indicates that insufficient income tax is withheld throughout the year.
You may submit a new W-4 form at any time. And if you give the government too much money, you’ll receive it back when you submit your income taxes.
Failing to Pay Estimated Tax
Another prominent kind of tax evasion is associated with company owners and entrepreneurs.
Most self-employed individuals are responsible for paying their own taxes on a quarterly basis, based on their income and expected tax payments.
Because they are self-employed, they do not have an employer to withhold taxes from their paychecks, which is normally a good safety net for those who may otherwise fail to submit their taxes. However, if you are self-employed and do not make your projected tax payments during the year, you will have a high tax bill at the end of the year.
There are many methods for calculating your quarterly anticipated tax payments. Just be sure the approach you chose does not leave you unable to meet your daily costs or land you with a hefty tax bill and underpayment penalties.
Everyone is pressured for time these days, not just self-employed Americans. Other reasons individuals may owe the IRS are related to events in their personal life. A taxpayer may have a family catastrophe or an emergency during tax season, preventing them from completing a tax return on time or paying the tax obligation in full. In such case, the IRS will send the individual a charge for the remaining balance.
Other taxpayers may simply misinterpret the tax rules and seek exemptions, deductions, and credits for which they are ineligible. In this case, the IRS will often contact the individual to notify them of the reporting mistake. The taxpayer must next validate the exemption, deduction, or credit claimed. Without evidence, the IRS will revise the taxpayer’s tax return, and the person may face a significant tax bill as well as penalties and interest.
Using tax software or hiring an accountant is a straightforward approach to address the majority of reporting problems. These tools will alert you to important deductions for your case, reducing the frequency of mistakes.
What the IRS Will Do
If the IRS believes you owe back taxes in any of the aforementioned scenarios, they will not hesitate to contact you.
The IRS usually sends you a bill in the mail, but they may contact you by phone as well. In severe circumstances, they may even try to pay you a visit at work or at home.
If the agency is unable to persuade you to pay your tax due willingly, it may resort to collection action. It has the ability to place a lien on your home and garnish your salary. It will also charge you fines and interest until you pay off your debt.
The Bottom Line
Focus on being self-motivated and educating yourself on your tax reporting and payment duties to avoid owing the IRS. If you have any questions concerning your tax reporting or payment requirements, consult with a tax attorney or a competent tax preparer. It is not a terrible idea to contact the IRS directly for information.
Above all, be aware and submit your taxes on time, no matter how much you owe. Larry Pon, owner of Pon & Associates, a tax planning and financial advising business located in San Francisco, adds that his “best customers are planners” who are “engaged and aware” of what is going on.
That’s good advice—just don’t be late in taking it.
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