I talk to taxpayers, clients, and prospective clients either on the telephone or in person every day. People who do not have tax problems do not realize that just because you owe the IRS money, are getting audited, or have not filed tax returns does not mean that you are a bad or evil person. Most taxpayers cannot identify with these problems, but I can tell you that usually a situation beyond the person’s control is what gets them into trouble.
Very often an individual’s money needs to go somewhere else for them to survive. Small business owners often have a problem paying all of their bills. If they do not pay their suppliers, they will not get any products. If they do not pay their employees, they will quit. If they do not pay their landlord, they will evict them. If they do not pay their utility companies, they will shut them off. The only one at the end of the week without their hand out is the IRS. So, when they cannot pay all of their bills, the first one they stop paying is their payroll taxes. Despite the fact that people know that they need to pay these taxes, very often there is just no money left at the end of the week. The IRS wants to be first, so they ultimately come at them with a vengeance.
When it comes to paying income taxes, independent contractors often fall behind because they do not have tax withheld from their paychecks. At the end of the year, there is not enough money to pay the IRS. Even if you cannot pay the taxes, the best strategy is to file your return on time because failing to file the return will result in a 4 1/2 % penalty a month, maxing out at 22 1/2% after 5 months. Many individuals file extensions, but this is only an extension to file, not an extension to pay. Failing to pay on time results in a 1/2 % penalty per month (maxing out at 25%) and interest, which is currently 5% compounded daily.
About 75% of citizens that come to me have at least one unfiled tax return. Many have not filed for years and some of them have never filed a return. What happens is they do not file one year, but have every intention of catching up the following year. Before they know it, they have fallen behind several years and are so overwhelmed because they do not know how to get started. Sometimes they come to the realization that they need help and come and see me and I get them on track. Other times it takes a letter or knock on the door from the IRS before they take some action.
There are many strategies we utilize with people with unfiled returns. Every case is different and everyone has a different challenge. What we do is come up with the best plan to minimize IRS involvement, so that there are no levies taking paychecks or wages.
Audits can get even the most honest taxpayer into a bad situation. If you want to decrease your chance of the IRS coming after you, make sure you have your return done by a qualified tax professional. A certified public accountant or enrolled agent will make sure that they include all of your income and will not exaggerate or overstate your expenses.
People and businesses who would never dream of breaking the law get into IRS trouble. The lesson here is to be proactive so that all of your rights are intact and you can control the situation, rather than have the IRS make first contact and make demands that are going to be very difficult, if not impossible to meet.