Failure to File One of the most common mistakes a taxpayer can make is failing to file a tax return.
If you live and earn income in the United States above a minimum threshold amount during a particular year, you are required to pay taxes and report that income by filing a federal tax return.
Many taxpayers are either uninformed or wrongly informed that they do not have tax filing obligations.
Failing to file can lead to penalties and interest being assessed against you.
Additionally the more delinquent tax returns you have, the more your tax liability, penalties and interest will be.
Even if you do not have a tax filing requirement for a given tax year, it may still be in your best interest to file a tax return because you may have had taxes withheld or might qualify for tax credits, which could result in a refund to you.
If you are required to file, but fail to do so, the IRS can file a substitute for return on your behalf.
A substitute for return is a return prepared by the IRS based on any information that may have for you (W-2s, 1099s, etc.
).
It is prepared using a filing status of "single" with a household of 1, which ignores any eligible deductions, credits, and exemptions that you may be able to claim.
The substitute for return will then calculate how much is owed and the IRS will attempt to collect that amount from you.
Under Withholding Employers typically withhold taxes from their employees' paychecks.
If enough taxes are not withheld from an employee throughout the year, the employee will likely owe the IRS when they file their tax return during tax season.
This tax shortfall is called under withholding.
It is caused by an employee claiming excessive exemptions on their IRS Form W-4-completed at the time of hiring-which results in not having enough income tax withheld throughout the year.
If you owe taxes when you file your tax return, you should meet with a tax attorney, CPA, or professional tax preparer to have him or her help you determine the correct number of exemptions you should be claiming.
Alternatively, the IRS has a useful withholding calculator on their website that can point you in the right direction.
Even if you had a refund on your taxes, a consultation with a tax attorney, CPA, or professional tax preparer may be a good idea.
He or she may find that you are currently over withholding, meaning that you are having more taxes taken out of your wages every pay period than is necessary to cover your tax bill.
This may not seem like a bad thing since you are getting a refund when you file your tax return.
However, if you were to reduce your withholdings, you could still cover your tax obligations and also keep more of your income throughout the year.
Estimated Tax Payments Another common form of owing the IRS is often made by business owners or self-employed individuals.
These taxpayers are responsible for paying their own taxes on a monthly or quarterly basis depending on their income and estimated tax payments.
Since they are self-employed, they do not have an employer to withhold taxes from their paycheck.
If they fail to make their estimated tax payments throughout the year, they will likely incur a large tax liability at the end of the year.
Many self-employed taxpayers are not aware of their reporting and payment obligations until it is too late.
When starting a business, it is vital that you research and be aware of the relevant tax laws.
Other Causes of Tax Debts Some other reasons people may owe the IRS relates to what is going on in their personal lives.
For example, a taxpayer may have a family crisis or an emergency that occurs around tax season that prevents the taxpayer from filing a tax return on time or prevents the taxpayer from paying his or her tax bill in full.
In this situation, the IRS will issue the taxpayer a bill for the amount still owing.
Other taxpayers may simply misunderstand the tax laws and take exemptions, deductions, and credits that they are not qualified to claim.
In this situation, the IRS will usually contact the taxpayer and inform the taxpayer of the reporting error.
The taxpayer's is then required to substantiate the exemption, deduction, or credit taken.
Without substantiation, the IRS will correct the taxpayer's tax return and the taxpayer may incur a tax liability, penalty, and/or interest.