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The Common Reasons for Tax Debt Issues

The Common Reasons for Tax Debt Issues

The Common Reasons for Tax Debt Issues

There are several reasons an individual might get caught up in Tax Debt issues. If you wish to avoid those issues, it is essential for you to know what those issues are and how could they potentially affect you.

Following are some of the common reasons for Tax Debt Problems;
 

1. Failure to File Tax Returns

Failure in filing for the tax returns is a common reason why individuals or a company gets caught up in a debt situation to the State or the IRS. It is certainly not against the law to incur tax debt; however, it is definitely against the law in failing to file a tax return when you or your business have surpassed certain pre-determined minimum income requirements by the government.

If you do not file your returns, (either properly, or at all,) the IRS will be liable to file a Substitute for Return (SFR). The SFR only lists income and does not have all of the permissible tax deductions. The result is that you or your company could end up owing a potentially large amount of taxes, which includes penalties and interest. Such an amount may not be accurate, nor favorable had the tax return been properly prepared and submitted in the first place.
 
In several instances, the taxpayers file their federal tax return, but fail or forget to file the state tax return. If a state tax return has not been filed, the state will file one on your behalf as the taxpayer. This is called an estimated state tax return (EST). In this case, the state does not take into account the deductions or leeways that you are allowed. Thereby placing you or your business in a higher income tax bracket. It will make you be taxed at essentially the highest tax rate allowed for the gross income.
Consequently, you would be taxed an amount that is higher than it should be, had the returns been
properly prepared.
 

2. Incorrect Tax Return Preparation

There are several reasons that could lead to mistakes being made when tax returns are being filed. Perchance you rushed the filling process just to meet the deadline, or you did not gather all the applicable information in time to complete the return; such mistakes could prove costly in the future. Additionally, the mistakes on tax returns could potentially be from a Certified Public Accountant (CPA) or tax preparer who was perhaps not familiar with all of the intricacies of the tax code, and as a result made mistakes. This is among the most common causes of mistakes that happens today. Whatever the reason may be, they can be costly, as accuracy penalties can reach up to 75% of the tax debt.
 

3. Failure in making Timely Estimated Tax Payments

Business owners often do not pay their quarterly Estimated Tax Payments (ETP). As a result, the tax debt accumulates to the following year. As a result, the business owner may not have enough money to pay the balance owed.
 

4. Early Withdrawal from the Retirement Funds

The IRS imposes a 10% penalty for early withdrawals from 401(k) IRA funds, specifically before the age of 59 years and 6 months. Many taxpayers do not expect this penalty and get caught owing a significant amount.
 

5. Lesser Withholdings

Some taxpayers choose to posses fewer withholdings than they should. Thus, when they file their returns at the end of the year, taxes are due. This results in inadvertent losses.
 

6. IRS or State Tax Audit

The IRS or the state may examine tax returns of your company. Based on the outcome of the audit, you might find yourself subjected to additional taxes due to penalties, or disallowed deductions.
 

7. Gambling Winnings

Infrequent gamblers sometimes forget to include gambling money in taxes. If you have gambling winnings, this income must be included in your tax return to avoid penalties. A failure to include it could mean an increase in due taxes.
 

8. Unrightful Claiming of a Dependent

There are a number of rules regarding tax claims made for dependents. These rules could be confusing. It is necessary to know the rules to avoid error in tax returns and to avoid being penalized if the IRS finds that the claim was inaccurate.
 

9. Unpaid Payroll Taxes

The withholdings which are made from the salaries of employees are held in trust by the business owner and must be forwarded to the IRS. Failure to do so is seen by the IRS as theft from the employees as well as from the IRS. Failure in paying this can result in personal assessment of the debt, penalties and fines.
 

10. Other Related Tax Issues

There are a few other reasons why you or your company may owe tax debts to the local tax authorities, or the IRS. The Tax professionals at SG Inc. CPA specialize in solving all types of state and IRS tax problems. Please contact us to get an evaluation for your tax resolution.