Why Do People End Up Owing the IRS?
Understanding Tax Debt’s Common Causes
Nobody likes getting a letter from the IRS saying they owe money. Yet thousands of Americans find themselves in this situation each year. Understanding the most common reasons for tax debt can help you avoid these pitfalls or recognize when you need professional assistance.
Incorrect Withholding Elections
One of the most frequent causes of tax debt is having too little withheld from your paycheck. This often happens when employees claim too many allowances on their W-4 forms or fail to update their withholding after major life changes like marriage, divorce, or taking on a second job. While having more money in each paycheck might feel good initially, it can lead to an unpleasant surprise at tax time.
Self-Employment Tax Surprises
Many self-employed individuals and gig workers struggle with tax debt because they’re responsible for both the employer and employee portions of Social Security and Medicare taxes. Without proper planning and quarterly estimated tax payments, self-employed people can face significant tax bills plus penalties.
Unreported Income
Forgetting to report income from all sources is another common issue. This includes income from side jobs, freelance work, investment earnings, or even gambling winnings. The IRS receives copies of 1099s and other income reports, so they’ll know if you’ve left something out.
Early Retirement Account Withdrawals
Taking money from retirement accounts before age 59½ typically triggers both taxes and penalties. Many people don’t realize they need to set aside enough to cover both when making early withdrawals, leading to unexpected tax debt.
Miscalculated Deductions
Taking incorrect deductions or overestimating their value can result in owing back taxes. This often happens with home office deductions, business expenses, or charitable contributions that lack proper documentation.
Missed Filing Deadlines
Filing late can result in penalties and interest that significantly increase your tax debt. Even if you can’t pay immediately, filing on time helps minimize the amount you’ll ultimately owe.
Are You Dealing with Tax Debt?
If you find yourself owing money to the IRS, don’t ignore the problem – it won’t go away on its own. Our team of tax professionals can help you understand your options, including payment plans, offers in compromise, and other resolution strategies.
Contact us today for a confidential consultation to discuss your situation and find the best path forward.
Give us a call at (214) 337-5000 or email us at fgacontact@fraziergills.com now!