Why Do So Many People Fall Behind on Their Taxes?

According to the most recent data from the U.S. Internal Revenue Service, Americans owed over $120 billion in back taxes, penalties, and interest in 2022. Clearly, despite the threat of stiff penalties, seizure of assets, and even jail time, millions continue to fall behind on their taxes.

Falling Behind

People get behind the tax eight ball for many reasons—but some of those reasons are more common than others, says Daniel Morris, a certified public accountant (CPA) with Morris + D'Angelo, a Silicon Valley-based accounting firm. Morris adds:

There's the "I'm too busy excuse," where the person's life is out of control and was simply too overwhelmed to complete the paperwork. Typically, that person believes they will get to it next week." Then there's the life disruption excuse, which has more validity. There could be a death, illness, cancer, divorce, or a loss of job that derailed them from performing their normal compliance requirements.

Harlan Levinson, a Los Angeles-based CPA, says he gets numerous calls each year on late tax payments, both individually and for businesses:

The reasons are myriad. Some people say they didn't feel like opening the mail, or they don't have the time to do their taxes...Then there’s the Americans who just don't have the money to pay their taxes, or who are overwhelmed by the whole tax filing process.

Whatever the reason, if you fall behind on your taxes for reasons other than financial hardship, it's important to reassess your tax payment plans. The price of neglect is too high; the IRS will come after you and won’t stop until you pay up.

Here's a more fleshed-out list of reasons that otherwise conscientious people get behind on their taxes.

Failure to File

One of the most common mistakes a taxpayer can make is failing to file a tax return. But if you live and earn income in the United States above a minimum threshold amount during a particular year, you are required to pay taxes and report that income by filing a federal tax return.

To see if you have to file a return, the IRS uses three criteria: your age, your filing status, and your income. Generally, once you reach a certain income level, the law requires you to file. The amounts are adjusted annually for inflation.

For tax year 2022 returns, individuals younger than age 65 must file if they make at least:

• $12,950 as single filers.
• $19,400 as head of household filers.
• $25,900 as married couples filing jointly and both spouses are younger than 65

The earnings threshold amounts go up a bit for individuals age 65 and older:

• $14,700 for single filers
• $21,150 for head of household filers
• $27,300 for married couples filing jointly where one spouse is age 65 or older
• $28,700 for married couples filing jointly where both partners are 65 or older

Under-Withholding

By law, employers withhold taxes from your paycheck. What you may not know is that if enough taxes are not withheld from your paycheck throughout the year, you, the employee, will likely owe the IRS when you file your tax return during tax season. This is also known as "under-withholding."

It's usually triggered when an employee claims excessive exemptions on an IRS Form W-4 (completed at the time of hiring). That means not enough income tax is withheld throughout the year.

You can file a new W-4 at any time. And if you find that you've given too much to the government, you'll get the money back when you file your income taxes.

Failing to Pay Estimated Tax

Another common form of falling behind on taxes is linked to business owners and entrepreneurs.

Most people who are self-employed are responsible for paying their own taxes on a quarterly basis, depending on their income and estimated tax payments.

Since they are self-employed, they do not have an employer to withhold taxes from their paycheck—that's usually an effective backstop for people who might otherwise forget to file their taxes. But if you're self-employed and you fail to make your estimated tax payments throughout the year, you’ll incur a large tax liability at the end of the year.

There are a variety of ways to calculate your quarterly estimated tax payments. Just be sure the method you choose doesn't leave you struggling to make daily expenses or set you up with a huge tax bill and underpayment penalties.

Additional Triggers

It's not just self-employed Americans who are pressed for time—everyone is busy these days. Some other reasons people may owe the IRS are linked to what’s going on in their personal lives. A taxpayer may have a family crisis or an emergency that occurs around tax season that prevents them from filing a tax return on time or from paying the tax bill in full. In that situation, the IRS will issue the taxpayer a bill for the amount still owed.

Other taxpayers may simply misunderstand the tax laws and take exemptions, deductions, and credits that they are not qualified to claim. In this situation, the IRS will usually contact the taxpayer and inform them of the reporting error. The taxpayer is then required to validate the exemption, deduction, or credit taken. Without proof, the IRS will correct the taxpayer's tax return and the taxpayer may incur a hefty tax liability plus a penalty and interest.

One easy way to correct the majority of reporting errors is to use tax software or hire an accountant. These resources will alert you to the deductions relevant to your situation and reduce the number of errors.

What the IRS Will Do

In any of the above circumstances, if the IRS thinks you owe past due taxes, they're not shy about getting hold of you.

Usually, the IRS sends you a bill via mail, but they might reach out to you by telephone. In serious cases, they may even attempt to visit you at work or at home.

If the agency is unable to get you to voluntarily satisfy your tax debt, it may take collection action. It has the authority to put a lien on your house and put a garnishment on your wages. It will also tack on penalties and interest until your debt is paid.

The Bottom Line

To avoid owing the IRS, focus on being self-motivated and educate yourself on your tax reporting and payment obligations. If you are ever unsure about your tax reporting and payment obligations, hire a tax attorney or a professional tax preparer. Contacting the IRS directly for information is not a bad idea.

Above all, always be alert, and always file your taxes on time, no matter what you owe. Larry Pon, owner of Pon & Associates, a San Francisco-based tax planning and financial advisory firm, notes that his "best clients are planners" and generally stay "involved and aware" of what is going on.

That’s good advice—just don't be late in taking it.