There are many reasons our clients get in trouble with the IRS and end up with back tax issues. If you sweated through tax season, afraid of getting “caught” for not paying the back taxes you owe, you are not alone. Here are the most common reasons our clients seek us out for help with their back tax issues.
1. Failure to make estimated tax payments – We have a lot of small business owners for clients and this is a common mistake we see many people make. Anyone who is self-employed (or who owns a small business) must make estimated tax payments at least four times per year. When these payments are missed, not only do you fall behind in paying the taxes owed on your earnings, you will also accrue additional penalties and interest.
2. Incorrect withholdings on wages earned – Many clients have their withholding set up wrong – and this sets them up for problems when tax season rolls around. It is essential to fill out your W-4 correctly since this determines how much your employer will withhold for state (if applicable) and federal taxes. If your withholding is incorrect, you could end up owing hundreds, even thousands in unpaid taxes at the end of the year. If you neglect to resolve the problem and you continue to accumulate tax debt, you may quickly accumulate a large tax liability when all the taxes, interest and penalties are added together.
3. Penalties for early withdrawal from a retirement account – Unfortunately, due the economic downturn, this is a common reason clients seek us out. Due to job loss, medical and/or health problems, or other economic factors, people are turning to their retirement accounts to access emergency money. If you withdraw from your retirement account, it must be included as part of your taxable income. Additionally, some withdrawals may be subject to a 10% penalty if you make a withdrawal prior to 59 ½ years of age.
4. Failure to file a return – You worked. You earned income. You didn’t file your tax return. If you fail to file a return and you owe taxes, you will accrue interest and penalties. Interest and penalties can rack up quickly. The best thing to do is to file your return as soon as possible and pay any taxes dues – the sooner, the better.
5. Filed a tax return, but didn’t pay the taxes due – You filed your tax return on time, but you didn’t have the money to pay your taxes. Once the IRS processes your return, the IRS will show you are indebted to them. While you may have avoided the penalty for failure to file, you will begin to rack up interest and penalties for failing to pay your taxes due.
6. Failure to pay payroll taxes – Many new small business owners get into IRS trouble for failure to pay their state or federal payroll taxes. Other taxpayers fail to pay payroll taxes for household employees, such as nannies or maids.
7. Failure to report gambling winnings as income – Any cash or prize worth $600 or more must be claimed as income. Most casinos and contest sponsors send information on winning players to the IRS. If you did not claim the information on your tax return, you will be assessed for the tax liability.
8. Taking too many exemptions, credits or deductions – Some taxpayers get away with taking too many exemptions, credits or deductions for awhile – in an effort to boost their tax refund. These can be red flags, which trigger an audit by the IRS.
9. Inadequate, incompetent or unqualified tax preparation – Be sure to hire a tax preparer you trust. Some taxpayers find themselves indebted to the IRS due to their preparer’s inaccurate preparation. Worse, some preparers are willing to file credits, deductions, or exemptions to pad your return. While getting you a larger (though undeserved) refund, they are padding their own wallet as well. Be sure to read over your return before signing it.
10. Tax liability due to deceitful spouse or former spouse – When you decide to file joint tax returns, you and your spouse become responsible for each other’s tax liabilities. Even if only one spouse is dishonest, the IRS will come after both taxpayers. Unless you can prove you were an innocent or injured spouse, the IRS will attempt to collect from both taxpayers, even if the marriage ends in divorce.
Posted by JK Harris & Company