IRS Tax Problems Can Go From Snowball To Avalanche
Posted by Dean Alexander on Wed, Oct 07, 2009
There are countless types of tax problems that a taxpayer can possibly encounter during their lifetime. Some of these people are fortunate enough to not face them while other people deal with tax problems that ultimately control how they live. I'd like to discuss the latter taxpayers.
Those with tax problems can logically be classified as one of two types of people. The two classifications are:
- "Know-er"
- "Didn't Know-er"
I will explain who a "Know-er" is, which should give you an idea of who a "Didn't Know-er" is until I come back and discuss, but first want to note that as you read about the "Know-er", do not believe that one classification is better than the other. Both types believed that they made the correct and logical decisions that were necessary at certain points in their lives.
"Know-er"
Who's A "Know-er"
The "know-er" is a taxpayer who owes federal or state taxes because they did not file their tax returns in prior years. These people did not have bad intentions by any means whatsoever; what happened was their snowball became an avalanche.
Common Way A "Know-er" Ends Up With a Tax Problem
In 2005 Brian was an owner/operator of an 18-wheeler. Many companies contracted him to transport their goods throughout the southern United States. At the end of the year, each company (let's say 3 of them) mailed him a 1099. This means that Brian is responsible for paying taxes on that amount because no taxes were taken out by the company at any point during the year.
Brian knows that because he gets a 1099, he is considered a self-employed person. He knows he can make more money, which means he pays higher taxes, and also is aware that he can deduct a large amount of expenses he incurred while driving his 18-wheeler. All he needs to do is figure out how much he spent during the year. Brian believes that the best way to do that is order the last 12 months of bank statements and spend a Saturday and Sunday coming up with the numbers. He's estimated that it will take him a good 7 - 10 hours to do.
Let's fast forward this example and assume Brian was busy every weekend because a new company wanted him to travel on Saturdays and Sundays. It's now the end of 2006 and it's tax time again. Brian believes that before he can do 2006 tax returns, he needs to file 2005. It's gonna take 7 - 10 hours for 2005 and probably the same amount of time at the least to get the expenses for 2006. The vicious cycle has begun...
Brian's tax problem has now taken a life of its own.
Why Is A "Know-er" Called A "Know-er"
You read the example. Great. Now you may be thinking to yourself, "I see the example is a realistic one but how does that relate to this category?" Let's address that.
Brian did not file his 2005 tax return and there is an even greater chance he doesn't file his 2006 taxes as well. The IRS has not contacted him for any reason during those years but he just received an IRS letter asking him to pay a tax debt they have determined for him before they take actions to collect like a tax lien or a bank levy. Although initially shocked when reading the letter, he knew it would come soon enough. In fact, Brian knew from the start if he didn't pay his taxes he wasn't going to go unnoticed forever.
And that is what a "Know-er" is
If there are some out there who would like me to elaborate on who a "Didn't Know-er" is just let me know and it'll be up in no time. In fact, if you have any questions or comments about tax relief or tax debt don't hesitate to post to the blog.