Regardless of what you feel about the Internal Revenue Service, or no matter how much you complain about where your taxes go, you need to pay your dues to Uncle Sam. April 15, or tax day, can be a very stressful time for many American taxpayers, who either pour over tax forms late into the night, or pay big money to an accountant and wonder if they could still be taxed for it. Taxes are definitely taxing, especially if you fall deep into tax debt. Yet you need not be afraid of IRS personnel knocking at your door for incurring tax debts. Here is a short guide on how to get rid of those ever-so-stressful tax debts.
The Four “Rs:” Why We Pay Taxes
To understand tax debt properly, you first need to know why we pay taxes. At one point in your life, you may have thought that the United States Government invented all sorts of taxes meant to drain your income and make your life miserable. You may have even been so frustrated that you took a brief political stand, and refused to pay your taxes at all out of protest.
Taxes may make a lot more sense for you if you know why the government enforces tax laws. A simple way to know why we pay taxes is through the Four “Rs:” revenue, redistribution, repricing, and representation.
- Revenue. Roads, schools, hospitals, and other government agencies all need money to build, operate, and maintain. The money needed to maintain these necessities all comes from taxes.
- Redistribution. The poor, the homeless, the handicapped, and other people who cannot afford to pay taxes and day-to-day expenses must be taken care of by the government. Taxes pay for the welfare expenses needed to make sure these people live decently and fairly.
- Repricing. Taxes are levied on consumer goods, luxury items, and other products like tobacco and alcohol. Value-added tax is a form of repricing.
- Representation. When you pay taxes, you also have a say and a share in how the government spends and allocates money. Taxation also grants you rights and privileges to demand accountability from government agencies.
What is Tax Debt?
Tax debt is any amount incurred from a tax payment that you cannot afford to pay. Tax debt can also arise if you are not able to file your taxes on time and you accumulate penalties. The IRS takes a dim view of people with tax debts, and may exhaust all necessary measures to ensure that you pay the government the taxes you owe plus the appropriate penalties.
Tax debts can be very stressful because they add up to a taxpayer’s financial burden. A person with an outstanding tax debt usually already has outstanding debts from other sources like credit cards, mortgages, and personal loans. If you have already taken out loans and have fallen into debt before tax day, you may already have the added problem of a tax debt right under your nose.
How People Fall Into Tax Debt
There are many reasons why people fall into tax debts. Among the most common reasons include:
- Miscalculations. To save on accountant fees, some people calculate and file their tax returns on their own. They may make serious mistakes on their declarations, and end up paying less than what they really owe.
- Bad finances. Many people with outstanding tax debts may find themselves in a bad financial situation before tax day. They may not have enough savings to pay for their taxes, and may have taken out taxable loans and purchases that add to their tax burden.
- Bad tax habits. Some people throw out receipts, invoice copies, and bills for products they buy or services they pay for. Bills and other documents are needed to back up any deductions or additions you may make on your tax return.
Prevention is the Best Cure
The best way to “get rid” of tax debts is to prevent them from happening at all. Don’t wait for April 15 to file your tax forms. When filling in tax returns, earlier is definitely better. Always keep copies of your receipts, bills, invoices, and other documents for your purchases and services you hired. Some purchases and services may qualify as deductions. You may also need to hire a competent but affordable accountant to fill in your tax forms and tax returns for you. He or she may be a family member or a close family friend.
It helps to keep tax books and tax codes for easy reference. Simplified versions of taxation guides are available from specialty bookstores or on the Internet. Tax codes and tax laws are legal documents, so they can be complicated for most ordinary taxpayers. You may want to consult with your tax lawyer or accountant when you study these tax books and codes from time to time.
Keep It Honest
If you do fall into a tax debt problem, the first thing you need to do is to admit that you have tax debt. Tax debts and other tax problems will not go away if you don’t talk about them up front with your accountant, or family members who would be directly affected by your tax debts. It is very important to keep it honest, and to be aware and mindful of your problem. By being open and honest about your tax debt problem, you can find more ways to generate income and savings to pay for outstanding debts with the IRS.
Avoid Taking Out Loans
Some people are tempted to take out loans or more debts to pay for an outstanding tax debt. Taking out another loan is one of the worst things you can do to pay for your tax debts. If you already have tax debt, chances are you have already run up many other unpaid debts.
It helps to make a priority list of debts that you need to settle as soon as possible. Tax debts should always take first priority for debts you have to settle. Other outstanding debts like credit card debt and personal loans can be paid after you have settled your tax debt.
Offer in Compromise
The IRS offers a solution to tax debts called Offer in Compromise (OIC). OIC stipulates that qualified individuals with outstanding tax debts to settle with the government to pay less than what they actually owe. To avail of OIC, you must secure a Form 656 from the IRS. You have to meet certain qualifications to avail of OIC:
- Doubt as to collectibility: You declare that you will never be able to pay your outstanding tax bill in full. The IRS computes the settlement amount that you should pay them.
- Doubt as to liability: You declare that you have a reason to doubt the correctness and accuracy of the tax liability.
- Effective tax administration: You do not contest liability to your outstanding tax bill, but you can prove that paying your tax bill would result in unreasonable and unbearable economic hardship. Elderly or handicapped taxpayers can avail of this OIC program.
OIC can be complicated, and the IRS may exhaust all necessary measures to investigate your OIC claim. You should consult with a tax lawyer or a tax accountant before you apply for an OIC.
Some people think that filing for bankruptcy would settle tax debts. Bankruptcy laws may absolve tax debts, but not unless they are over three years old and if bankruptcy courts deem the bankruptcy claim as valid. You probably would be better off if you filed instead for OIC instead of a Chapter 7 or Chapter 11 claim. Bankruptcy has many nuances and qualifications, and bankruptcy fraud is a serious crime.
Seek Professional Help
Hopefully, you do not need the kind of “professional help” that comes with appointments with the psychiatrist because you’re too stressed. Most taxpayers find tax laws and IRS policies to be very complicated and difficult to understand. Tax attorneys, certified public accountants who specialize in taxation, and enrolled agents can help you fill in your tax returns. One rule that you should follow is that you should never fill in your own tax returns if you do not have enough knowledge of tax laws and rules, or if you cannot get help from a professional tax accountant or tax lawyer.
Like any financial problem, tax debts can be easily avoided. Accountants and tax lawyers can help you fill in and file your income tax returns to eliminate, or at least minimize, tax debts. Tax debts can be stressful, and may involve a lot of government bureaucracy and maybe even the IRS calling you up. The soonest you can get rid of your tax problem, the better it would be for you and your family’s financial security. Not only would you be more financially stable, but you would also do your part in making a better future for the country.
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