The Wall Street Journal recently reported that as of the end of 2022, there was an increase (from 2019) of nearly 2 million additional individual taxpayers who owed the IRS and that the overdue tax balance went up from $308 billion to $316 billion.
This increase could be due to several factors, including the end (or rollback) of many COVID measures, infrequent notices to pay, and surprise taxes due in April.
Finding Out You Owe in April
According to the WSJ, most people are used to getting a refund in April and may not be able to pay the tax bill when they find out they owe taxes.
It’s easier than you might think to owe taxes instead of getting a refund. There are multiple reasons this could occur.
First, you could undergo significant life changes—like getting married, having a child, or even being promoted at work. If you work at a W-2 job, your withholding might not be high enough, resulting in owing rather than receiving a refund. This sort of surprise can leave you unable to pay immediately and accrue interest and penalties.
A second example is people who work side hustles in the gig economy. For instance, maybe you’re driving for Uber and are surprised by a tax bill come April. Freelance and gig work don’t take taxes out of your pay. You’re fully responsible for the tax payments on your own. Paypal, Stripe, and other payment processors issue 1099-Ks, whereas many non-W2 work results in a 1099-NEC (non-employee compensation). Both report money to the IRS that you need to pay taxes on. Experienced freelancers are (often) aware that they need to pay taxes quarterly, but without that knowledge, you can find yourself short in April.
When Infrequent Notices Increase Your Interest
Until you pay your entire owed amount, the IRS will continue to accrue interest and penalties on your tax debt. Unfortunately, the IRS only sends out annual balance-due reminders. The infrequent reminders result in most taxpayers not paying regularly—and compounding what they owe.
Do you have concerns about back taxes and penalties? Reach out to Highland Tax Group to see how we can help you.