Tax problems start in many ways. They usually start small. You don’t file one year because you’re busy and don’t have the time. Or you don’t have the money to pay the balance due. Then year two comes and it’s a little easier not to file because you haven’t heard from the IRS about the unfiled return. Then year three comes and it becomes easier not to file. Then the IRS contacts you and lowers the boom on you.
Here are the most commons reasons for not filing:
- Job loss
- Medical issues
- Death in the family
- Economic downturn
- Business problems
- Marital problems
Let’s discuss each of these and see what can be done.
The loss of a job is an incredibly stressful time. There are both financial and emotional issues involved. Many of us, especially men, are defined by our jobs. When we meet somebody socially for the first time the first question asked is “What do you do?” None of us want to say we’re unemployed. In talking to our clients that are, or were unemployed, I can tell that it is an incredibly stressful and humiliating experience. You are doing everything you can to support your family in the lifestyle they experienced when you were employed. You especially don’t want your children to suffer or do without what their friends have. Many people collecting unemployment don’t have income taxes withheld because they need every penny. They think that when they get called back to work, or get a new job, they’ll have taxes withheld and catch up. That almost never happens. Many times, a distribution is taken from a retirement plan without adequate taxes withheld and when the return is prepared there is a 10 % early withdrawal penalty because the person withdrawing the money is under the age of 59 ½. Then the end of the year comes and you’re still stressed because you’re still out of work. You have your return prepared and you owe money that you don’t have. In many instances the return doesn’t get filed.
What do you do when you’re faced with huge medical bills, or need funds to pay for medical care? Most people will do whatever is necessary to see that they’re family has the best medical care possible. In some instances, taxpayers adjust their tax withholding downward to have more in their paycheck. They might withdraw funds from a retirement plan. If they’re self-employed they might skip their estimated tax payments. Just as in the Job Loss above you owe money you don’t have.
Death in the Family
This is even worse than the Medical Issues above if you’re the one responsible for the funeral costs and final medical expenses. It’s worse because you’ve lost a loved one. It might even be one that you relied on for their income.
The cost of everything is going up. Your employer cuts your hours. You no longer get overtime. That year-end bonus disappears. Income is down and costs are up. You fall behind on your bills, including your mortgage and credit cards. You work a deal with the credit card companies to write off a part, or even all, of your balance. Good deal, right? Then in January you get a Form 1099-C from the credit card company telling you the amount forgiven has to be reported as income on your tax return. Unless you qualify to be considered as insolvent that amount needs to be reported and is taxable.
You lose a major customer. A supplier increases their prices to a crazy amount and you can’t raise your prices to keep up. Insurance costs go up. Utilities go through the roof because the price of oil went up. What do you do? Many stop paying their quarterly estimates. Unfortunately, many stop paying their payroll taxes.
Many of those that come to me with tax problems also have, or had, a marital problem. I’m not sure if the tax problem causes the marital problem or the reverse is true. The stress of one of these problems many times causes the other to pop up. When a marriage starts to fail and there is a separation the income stays the same but the expenses increase. Paying for one household is tough enough. I can only imagine how expensive it is for two. Add in the cost of each spouse trying to outdo the other with the children. Not to mention the cost of a new ”significant other.”
All of these issues, and many more too numerous to mention, can cause tax problems. It could be in the form of unpaid returns or unfiled returns.