6 Ways to Avoid Owing an IRS Tax Debt

Posted 1/23/2009 2:21:50 PM

A tax debt is one of the worst kinds of debt that you can get into, as the IRS often assesses high penalties and fees that can drastically increase your total liability. Thankfully, with a little bit of organization and observation, there are ways that you can avoid ever getting into the situation in the first place.

1. Adjust Withholdings
An individual taxpayer can change their withholdings at anytime by filing a new IRS Form W-4 with their employer. It is usually a good idea to take advantage of what we call the “Goldilocks” approach to withholdings—not too much and not too little. Too much, and you are giving the federal government an interest free loan. Too little, and you are going to have to cut a fat check, and possibly pay a penalty, come April 15th.

2. Estimated Tax Payments
Estimated tax payments are essentially a substitute for withholding taxes for the self-employed. Unfortunately, the historical failure of small business owners to timely and accurately pay estimated tax payments has led the IRS to shift its gears and focus on small business owners when it comes to audits. If you are required to make estimated tax payments, then it is now more important then ever to make sure you make them on time.

3. Follow the Rules
The worst possible mistake you can make while filing a tax return is claiming a deduction you do not qualify for. A lot of taxpayers make the mistake of assuming that they qualify for credits and exemptions they do not actually qualify for. One good example of this is the child tax credit – while it seems like anyone with a kid can get one, there are a lot of qualifications you may not be aware of. Always double, and triple check any large exemptions or credits.

4. Cover Debt
If you are unable to pay your full tax bill by the due date, act fast to set up an alternative payment method. By calling the IRS, or having a tax specialist do so, you can set up an Installment Agreement with the IRS which will let you pay your debt off in monthly payments. This is a much better choice than tax evasion, which could result in hefty fines and penalties.

5. Seek Professional Help
Before sending in your final tax return, have a professional tax preparer or someone knowledgeable in taxes to look over it. You may have accidentally claimed a deduction you did not qualify for, forgotten to include a big expense, or even made a simple math error. It may well be worth the extra expense to have a professional tax preparer review your returns to reduce the likelihood of receiving an additional tax bill or audit notice. A professional tax preparer will also be able to review you return for any credits and deductions you have overlooked.

6. File Your Return – Even if You Don’t Think You Will Owe
Almost all individuals are required to file an income tax return if their gross income exceeds the standard deduction plus one personal exemption (i.e. valued at 8,950 in 2008). That is the case even if you do not believe you will owe any taxes. Failing to file your return puts you at risk of having the IRS file a return on your behalf, better known as a Substitute for Return. With a Substitute for Return, the IRS will claim single filing status and the standard deduction for the taxpayer—often leaving thousands of dollars in possible deductions and credits unclaimed. This often results in taxpayers being assessed a larger tax liability than they would have had they filed their own return. Finally, even if you are not required to file a return, you may want to if you are eligible for credits that could result in a refund to you.