Top 10 Reasons People get into Debt with the IRS

Posted 8/13/2008 11:43:32 AM

Although the specific details regarding how someone gets into debt with the IRS will vary widely from case to case, there are a few common reasons that we have seen over the past few years. If you do not already owe back taxes to the IRS then remember these 10 reasons when you prepare your next tax return.

1. Failure to File a Return
If you made any money during the year then you will need to file an income tax return with your state and federal government. If you had enough taxes withheld from your paycheck, then you may not need to pay anything else. However, if you do owe the IRS more money then you will need to pay it as soon as possible.

2. Filed a Return, But Did Not Pay
If you filed a tax return that showed you owing money to the IRS then you need to pay it before the April 15th. Once the IRS processes your return and sees that no payment was included you will be in debt to the IRS. Also, if you miss the deadline, then the IRS is going to begin assessing interest and penalties on top of what you already owe.

3. Incorrect Withholdings on Your Wages
It is absolutely essential to have the correct information and withholdings on your W-2 form if you work as a wage-earning employee. These forms are used to determine the amount of taxes your employer will deduct from your paychecks. If the amount is wrong, then you could end up owing hundreds or thousands in unpaid taxes at the end of the year. Additionally, if this goes unnoticed for a few years, you could be looking at a huge tax liability.

4. Gambling Winnings
All money and prizes won from gambling – or any contest or lottery – must be treated as income. If you win anything valued at over $600, then it must be included in your tax return. Usually casinos and contest sponsors send their data to the IRS, who will know that you did not claim your prize and assess the necessary tax liabilities.

5. Excessive Exemptions, Deductions or Credits
Although you may get away with it at first, taking excessive deductions or credits is a sure-fire way to land into debt with the IRS. Although no one knows for sure how the IRS determines what returns to audit, taking too many credits will raise a huge red flag. Then, if you are audited, the IRS will determine if you owe more then you paid and assess the resulting back taxes.

6. Incompetent Tax Return Preparation
Sometimes taxpayers find themselves with owed tax liabilities even when they did everything right. Just because you take your tax returns to a professional does not mean that they did everything accurately. Make sure to review everything before signing it to ensure the preparer did not forget any of your income sources or take too many deductions on your return.

7. Unpaid Payroll Taxes
Hiring employees means paying federal and state payroll taxes. Even if the employee is a household employee, such as a nanny or maid, you will still need the necessary payroll taxes. This causes a lot of new business owners to get into IRS tax debt, as they do not realize the tax laws surrounding payroll and employees.

8. Failure to Make Estimated Tax Payments
If you are self-employed, or own a small business, then you need to make estimated tax payments at least four times per year. If you do not, then you will not only owe taxes from all your earnings, but you will also have to pay an additional penalty for not making quarterly payments.

9. Deceitful Spouse or Former Spouse
Married couples filing their tax returns together are technically both responsible for the other’s tax liabilities. When one spouse is deceitful with their money, the IRS will come after both taxpayers. Even if the marriage ends in divorce, the IRS still has 10 years to collect on the taxes they are owed.

10. Penalties for Early Withdrawal from Retirement
The federal government offers different tax benefits to taxpayers that plan for retirement. With some accounts, such as a Roth IRA, you pay taxes on the funds before they are placed in the account and after you retire you can collect the money and accrued interest without paying taxes on it. However, if you have to withdraw funds from these accounts early, you will have to pay associated penalties that can easily add up if left unpaid.