Taxes are one of those pesky things in life that have to be addressed head-on. Delaying the payment of taxes by not making the appropriate deposits, under-withholding, or failing to file tax returns on time is a recipe for disaster. Tax debts that are too big to pay can quickly accrue. Interest and penalties are assessed for failing to pay taxes and failing to file tax returns on time compounding the total owed. A difficult financial situation, turns in to a seemingly impossible financial situation when tax debt is added to the equation.
Unfortunately, I see procrastination on the part of taxpayers create serious financial problems far too often. Many tax problems can be avoided by taking a proactive approach to managing financial affairs and by making taxes a top priority. How do you stay on track with taxes? It all starts with understanding your tax obligations. Then, take steps to follow through on those obligations. Set withholdings correctly, set aside funds for deposits and make those deposits on time whether it’s for payroll taxes, excise taxes or just estimated tax payments. Filing requirements for individuals, generally speaking, are fairly simple. Businesses on the other hand may be required to file a number of different types of returns. Failure to file penalties can add up to a substantial some so it is important to know your filing requirements and file on time. By the way, if you have foreign assets of any type, be sure to inform your tax preparer or CPA. Those with foreign assets may be required to file an FBAR and/or the new Form 8938. The penalties for failing to report foreign assets can be huge. Don’t fall into this trap!
Once you are confident you understand your tax obligations, periodically review those obligations as the may change from time to time. Tax laws are always changing. Changes in the law may require you to make adjustments to your plan to satisfy tax obligations. Wage earners should review their withholdings at least once per year and whenever there is a change that affects their taxes, like a new baby, a foreclosure, marriage, divorce, etc. Business owners need to review their tax obligations more frequently and must stay apprised of tax law changes. A good CPA can help in this area.
As the saying goes, “even the best laid plans go awry.” If tax debt is accrued that cannot be paid, don’t ignore it. The IRS won’t! Take steps to resolve the tax debt. The IRS offers programs for taxpayers that are unable to pay their back taxes such as an offer in compromise, currently not collectible status, or an installment agreement. The longer a taxpayer waits the more difficult and costly a tax problem can become. The IRS can be very aggressive in its effort to collect delinquent taxes. Ignoring a tax debt may result in the IRS garnishing wages or levying bank accounts. In some cases, a procrastinating taxpayer may lose important appeal rights. Addressing tax issues head-on can help avoid significant problems that can affect finances for years in some cases.