Many people are asking themselves “why do I owe taxes this year?” or “what happened to my refund?” for the first time in a long time or ever! On the surface, the reason for owing taxes or getting a reduced refund when you file this year is due to massive tax law changes that recently went into effect. However, at the root of the problem is a tax withholding issue. Learn more about tax withholding, how to fix it, and what to do if you cannot pay the tax due all at once.
Why Do I Owe Taxes to the IRS or North Carolina?
The simplest explanation for why taxes are owed on individual income tax returns is that not enough taxes were paid in throughout the year. For employees, Federal and North Carolina income taxes are withheld from each paycheck and remitted by their employer on their behalf. For self-employed people, taxes are self-remitted through paying in taxes on a quarterly basis directly to the IRS and the North Carolina Department of Revenue (NCDOR). A person’s true tax liability is calculated each year when tax returns are prepared. If they paid in more taxes throughout the year through paycheck withholding or quarterly estimated tax payment than their true liability they will have a refund. Unfortunately, if they did not pay in enough taxes throughout the year then they will owe taxes.
How Do I Fix IRS and North Carolina Tax Withholding?
The first step in fixing tax withholding is to understand the proper amount of taxes that should be withheld. You can simply use your prior year tax return to gauge how much you need to have withheld in the current year in times when tax laws are relatively unchanged (not the current situation) and when no major changes to your income or major life changes (i.e., children, marriage, home purchase, etc.) are expected. However, more precise methods to calculate your withholding can be found in the form of withholding calculators found on the respective IRS and North Carolina Department of Revenue websites.
What If I Cannot Pay Taxes Due to North Carolina or the IRS?
The simplest method to address taxes you owe that you are unable to pay at once is to setup a standard installment agreement with the IRS and the North Carolina Department of Revenue. Both the IRS and NCDOR will allow you to pay the taxes due over time. Generally, as long as you make timely payments you won’t have to worry about scary enforced collection actions such as wage garnishments and bank levies (aka clearing out your banking account). There are other tax relief options to negotiate lower amounts depending on your circumstances in the event that the amount of the standard installment agreement causes a financial hardship. A qualified tax professional can be helpful in these instances and may even be able to put your account on hold or even help you to settle your tax debt altogether especially if there are other back tax balances. Tempted to not file at all? Please, please file the returns! Not filing the returns will result in steep penalties for failure to file in addition to penalties for failure to pay whenever you eventually decide to file the return or even worse when the IRS or NCDOR decides to file the return for you on your behalf (also known as a Substitute-for-Return).
In closing, if you owe taxes it is because not enough taxes were paid in throughout the year. The proper amount of taxes will need to be paid in through adjusting your withholding with your employer or by remitting taxes directly to the IRS or NCDOR to avoid owing taxes in future years. Payment plans are available to pay amounts due over time if needed. However, if the payment plan creates a hardship then other tax relief options do exists which are best explored by a qualified tax professional.
About the Author:
Lauren Massie, CPA, EA, MBA resides in Raleigh, North Carolina. The primary focus of her CPA practice is income tax representation for individuals who need tax help with the IRS or the North Carolina Department of Revenue. She regularly assists clients with issues such as unfiled tax returns, back taxes, wage garnishments, bank levies, installment agreements, and the filing of an Offer in Compromise to settle tax debts. Have questions? Lauren can be reached directly at (919) 792-8511 or through this link.
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Lauren Massie
Lauren Massie, CPA, PLLC
8480 Honeycutt Road, Suite 200
Raleigh, NC 27615
(919) 792-8511
Lauren Massie, CPA, PLLC resides in Raleigh, North Carolina and serves clients throughout the Greater Triangle Area including cities such as Wake Forest, Durham, Cary, Chapel Hill, Morrisville, Holly Springs, Fuquay-Varina, Clayton, Louisburg, Knightdale, Zebulon, Rolesville, Wendell, Hillsborough, Youngsville, Franklinton, Garner, Zebulon, Henderson, Franklinton, Holly Springs, Creedmoor, and Angier.