Why do people end up in tax debt?
New research has shown the most common reasons for people getting into debt with the IRS and state tax authorities. These are earning more income than expected, divorce, late payment penalties and unfiled tax returns.
How to avoid a tax debt – excess income
The research showed that the leading cause of going into tax debt with the IRS was added income. That’s no bad thing for you – everyone likes extra money – but you need to be sensible with it.
Essentially the best two methods to be sensible with your unexpected added income is to keep a regular record of your income using accounting software such as QuickBooks, Xero or NetSuite and then to put the money aside immediately.
The software suites will often link directly with your bank accounts and you can monitor monthly income and outgoings to the cent. The online subscription fees are tax deductible too!
In knowing your monthly income then you have an idea what money to put aside for the tax payment at the end of the financial year. It may pay to set up a quick-access bank savings account to transfer your monthly tax burden into. Effectively you’re ‘paying your taxes’ every month as opposed to sweating to pay the bill in the weeks before the due date.
Tax debt and divorce
Divorces are a nightmare aren’t they? Access to the kids, alimony, property… and yes, taxes! It is important you get the tax element for the year preceding the divorce rectified.
To add to the complication, different states have different laws as to the division of property. 17 states have ‘Community Property’ laws where the acquirer of the property (or tax obligation) remains obligated or owner.
The other 33 state effectively split obligations 50/50. This could mean if you’re the husband or wife of a millionaire businessperson and you were the homemaker you could be slapped with a large tax bill unless you fight it in court.
In both cases, it might be advisable to get hold of a tax attorney as part of your divorce proceedings.
Unfiled tax returns & tax penalties
Taxes are a pain! They involve paying money to a government that uses your hard-earned money on things you may disagree with, be it wars abroad or subsidizing health insurance for someone you don’t know or care about!
You could also be in a chaotic situation with family or income issues and completely overlook filing your tax return by the due date. It happens – don’t worry! Whatever your reason, the IRS and state tax boards will look upon your late- or non-filing dimly and unless you do something about it will take measures against you to ensure that you do pay in the end.
States can even rescind your driving license, making it illegal to drive anywhere until you pay your taxes. The IRS has far worse powers at its command too. At the very least, any tax rebate you are due will not be paid until you do it, and that could cost you money!
The IRS can estimate your tax burden for the year as well and hit you with a bill that excludes the reasonable allowances that you may include on your correctly filed tax return. That means you have a fight on your hands.
The solution is to file your tax return as soon as possible. If you have multiple unfiled tax return and the IRS has woken up to it, sending you a letter, then it may pay to get in touch with us at Defense Tax Partners as soon as you can to discuss the problem.
Another element: if you file your tax return but don’t pay your taxes by the due date you will be hit by penalty charges. This was the second biggest reason for tax debt in the research. It pays to pay your tax on time! Use our company to help you deal with any significant tax debt.
So what can we do for you?
Here at Defense Tax Partners our team of tax debt experts can help you navigate the dark corners of tax regulation and tax law.
At the very least we can negotiate with the IRS agents on your behalf and often reduce the eventual repayment burden for you. In most cases this will result in a repayment plan for your back taxes to be paid in an agreed time period.
In some cases, we can get your tax bill reduced to just cents in the dollar with an offer in compromise agreed with the tax authorities.
Call us for a free consultation today to discuss your needs!