Tax time can be a great relief for those expecting a refund, but for others, it can be a time of financial worry and confusion. You may wonder how you ended up owing the IRS in the first place and, more importantly, how you can resolve this looming debt. This blog aims to shed light on why people owe the IRS and outlines ways to climb out of the tax debt hole.
How People End Up Owing the IRS
Insufficient Withholding
One of the most common reasons for owing taxes is needing more withheld from your paycheck during the year. It can occur if you need to accurately fill out your W-4 form when starting a new job or after a significant life change like marriage or the birth of a child.
Freelance or Contract Work
Freelancers, consultants, and other self-employed individuals are responsible for paying the employer and employee portions of Medicare and Social Security taxes. They must also make estimated tax payments throughout the year, and failure to do so often results in tax debt.
Capital Gains
If you’ve sold an asset, such as stocks or property, for a profit, you must pay capital gains tax. Many people overlook this obligation, leading to unexpected tax debt.
Penalties and Interest
Late filing or payment can result in penalties and interest that increase your tax liability, creating a snowball effect that makes the debt more challenging to resolve.
Life Changes
Events like divorce, retirement, or withdrawal from a retirement account can change your tax situation unexpectedly, often resulting in a debt to the IRS.
Getting Out of Tax Debt: Solutions and Strategies
File Your Tax Returns
The first step in resolving IRS debt is to file any missing returns. This provides a clear picture of what you owe and stops additional failure-to-file penalties.
Consult a Tax Professional
Enlisting the help of a certified public accountant (CPA) can offer valuable insight into your tax situation. A CPA can help you understand your debt and explore potential resolutions.
Installment Agreements
If you can’t pay your tax debt immediately, consider negotiating an Installment Agreement with the IRS. These agreements allow you to pay your debt over time in manageable monthly payments.
Offer in Compromise
For taxpayers who genuinely can’t afford to pay their tax debt, an Offer in Compromise (OIC) might be a viable solution. An OIC allows you to settle your tax debt for less than the full amount owed, although the application process is stringent.
Penalty Abatement
You can have some penalties reduced or removed if you have a reasonable cause for not paying your taxes on time. Speak with a CPA about how to apply for penalty abatement.
Hardship Programs
The IRS has provisions for those experiencing significant financial hardship. Under these circumstances, collection efforts may be temporarily halted, giving you time to improve your financial situation.
Be Proactive
The worst thing you can do is ignore your tax debt. The longer you wait to address it, the more penalties and interest will accrue, worsening the situation. Take steps immediately to resolve your tax liabilities and avoid more severe consequences like tax liens or levies.
Getting Help With IRS Tax Issues
Owing money to the IRS is a situation many find themselves in, but it’s not an insurmountable problem. By understanding how you got into tax debt and taking proactive steps to resolve it, you can navigate your way to financial stability. Remember, when it comes to tax debt, the sooner you act, the better your options for resolution will be.