1) Failure to file tax return(s)
This is a common reason why an individual or company owes money to the State or the IRS. It is not against the law to have tax debt, but it is against the law not to file a tax return when you or your business surpasses certain minimum income requirements.
If you do not file your returns, the IRS will file a Substitute for Return (or SFR). Typically, the SFR will only list income and not have all of the allowable deductions. The result is that you or your company could end up owing a large amount of taxes plus penalties and interest (that may not be accurate had the tax return been properly prepared).
In many instances, taxpayers file their federal tax return, but fail to file the state tax return. If a state tax return hasn’t been filed, the state will file one on behalf of the taxpayer; this is called an estimated state tax return (EST). In this case, the state does not take into account all the deductions that you are allowed. Therefore, the state tax return would place you or your business in a higher income tax bracket, essentially taxing at the highest tax rate allowed for the gross income and taxing an amount that is higher than it should be had the returns been properly prepared.
2) Incorrect tax return preparation
There are a number of reasons that lead to mistakes being made when tax returns are being filed. Perhaps you rushed the filling process just to meet the deadline or did not gather all the applicable information on time to complete the return. Additionally, the mistakes on tax returns could be from a Certified Public Accountant (CPA) or tax preparer who was not familiar with all the intricacies of the 70,000+ pages of tax code, and as a result made mistakes. This is one of the most common situations that happens today. Whatever the reason, these mistakes can be costly as accuracy penalties can reach up to 75% of the tax debt.
3) Failure to make timely estimated tax payments
Often times, business owners do not pay their quarterly Estimated Tax Payments (ETP’s) during the year. The tax debt accumulates to the following year, and the business and/or business owner may not have the money to pay the balance owed.
4) Early withdrawal from retirement funds
The IRS imposes a 10% penalty for 401(k) IRA withdrawals before the age of 59 1/2 for unqualified withdrawals. Many taxpayers are not expecting this and get caught owing the penalty.
5) Under‐withholding
Some taxpayers choose fewer withholdings than they should. Then, when they file their returns at the end of the year, taxes are due.
6) IRS or state tax audit
The IRS or state may examine your or your company’s tax returns. Based on the outcome of the audit, you may be subject to additional taxes owed due to penalties, disallowed deductions or other reasons.
7) Gambling winnings
If you have gambling winnings, this income must be included in your tax return. This could mean an increase in taxes due.
8) Claiming a dependent that isn’t rightfully theirs to claim
There are a number of rules regarding claiming tax for dependents which could be confusing. If one does not know the rules, one could inadvertently complete the tax returns in error and later be penalized if the IRS finds that the claim was inaccurate.
9) Unpaid payroll (forms 940 and 941) taxes
The withholdings are made from the salaries of employees, these funds are held in trust by the business and are supposed to be forwarded to the IRS. Failure to do so is seen by the IRS as theft from the employees AND from the IRS, which is very serious. Failure to pay this can also result in personal assessment of the debt, penalties, and fines.
10) Mistakes from another CPA or tax company
To have an in-depth understanding of the 70,000+ page tax code, how it applies to your unique situation, and the best way to apply it in order to ensure you pay the least amount of tax legally required, is very complicated. In addition, it is critical to have an insider’s understanding of the IRS and/or State taxing authorities in order to get the best results. We have numerous clients who come to us after having “tried” to do it themselves or having hired another tax firm that either made mistakes or in some cases billed the client and did nothing.
These mistakes by clients or other tax resolution firms, akin to having a botched surgery, are in many cases very difficult to solve. It is much better to start with the most experienced tax team in the industry. Only trust your life or taxes to the very best.
11) Other Tax Issues
There are a variety of other reasons why you or your company may owe tax debts. The CuraDebt Tax professionals specialize in solving all types of state and IRS tax issues. Contact us to get a free tax resolution evaluation.
