Why You Owe Taxes

Now that we have established:

1. That no matter your tax debt circumstance there is a solution!

2. You have rights as a taxpayer and it pays to excise them.

Let us discuss why you owe taxes in the first place and how you can avoid tax debt in the future.

Scenario One – The Business Owner

Whether you are a seasoned business owner, or you just survived your first year in business, getting behind in income tax obligations is easy! Unfortunately, there are several ways a taxpayer can find themselves owing taxes at the end of the year. If you are self-employed or have other income where taxes have not been withheld, you should be making Quarterly Estimated Tax Payments. Simply estimate that amount of tax you will owe on your taxable income not subject to withholding. This will determine the amount of quarterly tax payments you will pay to the IRS. You can learn more about Tax Withholding and Estimated Tax by clicking the link below and reviewing the IRS Publication 505. You may also want to try out the IRS Withholding Calculator by clicking on the link provided. If estimating process seems overwhelming or is simply not worth your time, you might consider a tax professional assisting you with estimating your future taxes owed and establishing a payment plan with IRS in your behalf.

Tip: The Withholding Calculator has several pages with questions relating to your taxpayer status. Including filing status, credits, expected income and withholding adjustment to income and deductions. By inputting your salary and any other information you project about jobs where taxes are not withheld you can make a good estimate of the taxes you will owe for the year.

Scenario Two – The Employee

Another possibility why you owe, you did not have enough federal tax withheld by your employer from your pay. Employers base how much they withhold in taxes based upon the information on your W-4, Employee’s Withholding Allowance Certificate. Check the amount being withheld, ask yourself it is enough to cover your taxes. You may need to adjust the amount your employer withholds. If you need to change the amount of tax withheld give your employer a new form W-4 (For a copy of the most current W-4 click this link). You can also increase the amount withheld to cover any additional tax you estimate you will owe. For additional information on how you adjust your tax withholding click the link below and review IRS Publication 919 How 

Do I Adjust My Tax Withholding?

Payment Options

1. You have enough money to pay your taxes

a. If you are fortunate enough to have cash on hand to pay your entire tax debt you can file your return either independently or with assistance of a tax professional. After your income tax documents have been prepared you sign your return and write a check for the unpaid taxes and mail it off or you can file and pay electronically. 

2. You Do NOT have enough money to pay your taxes

a. If you are unable to pay the full amount you owe when you file you may request an Installment Agreement from the IRS. Attach IRS Form 9465 Installment Agreement Request to your tax return when you file. If the IRS approves your request, you can make monthly payments instead of paying the entire bill all at once. A user fee will be charged to setup the agreement.

3. Borrowing money could save you money

a. If you were not anticipating a tax bill paying out a large sum of money may be impossible. Regardless of whether you can pay you still must file your return. We know this might seem like we are stating the obvious, but to many taxpayers, tax debt is understandingly stressful, even overwhelming, causing one to intentionally ignore IRS letters and demands. A failure to File Penalty is typically 5% of the unpaid taxes for each month your payment is late. In generally this will not exceed 25% of your unpaid taxes. But still, it is an unnecessary amount of money to pay. It may be in your best interest to take out a bank loan with a lower rate of interest or use a credit card with an available credit limit.

Reminder: Penalties and interest will continue to accrue on the unpaid tax debt until the bill is paid in full. We strongly encourage you to not delay, as mentioned before, there is a solution, with tax professionals waiting to assist you.