Tax debt, or the difference between taxes owed and taxes paid, is estimated to be over half a trillion dollars in the United States when combining outstanding debts from both federal and state taxes.
And, it only figures to get worse as the 21st century economy continues to evolve.
“The Internal Revenue Service (IRS) reported that at the end of fiscal year 2018 there were 13.1 million delinquent taxpayer accounts. This is a staggering amount,” said Wade Schlosser, CEO of media company Solvable, “and given the rapid expansion of the gig economy, like ride-share drivers, freelancers, or other 1099 contractors, we expect this delinquent number will grow.”
In a recent report, LendEDU analyzed over 75,000 unique cases of tax debt from Solvable’s database to find the average tax debt in each state, in addition to the most common reasons people fall into tax debt.
Wisconsin’s average tax debt was $18,146, which places the Badger State 32nd when ranking the respective tax debt figures for all 50 states and Washington D.C. from lowest to highest. The nationwide average tax debt was $16,849; 21 states had a tax debt figure below the U.S. average, while 29 states, including Wisconsin, and Washington D.C. were above the average.
The average tax debt in Wisconsin falls in regional trends, which saw states in the Midwest, Northeast, and West generally have higher than usual tax debt.
In Wisconsin, the main reason residents fell into tax debt was due to owing more than expected, which represented 15.31% of the state’s tax debt cases. Other common causes of tax debt in Wisconsin included back tax penalties (13.33%), being in a higher tax bracket (11.60%), unfiled taxes (11.11%) and divorce (10.37%).
Nationwide, the top five causes of tax debt were the same as Wisconsin’s causes, but in a slightly different order.
With the 2020 tax season here in just a matter of days, these significant tax debt figures, especially the average tax debt in Wisconsin, should serve as ample reminders regarding the importance of getting your personal finances and documents in order so no mistakes are made when taxes are filed.
If there are mistakes, you could be looking at a five-figure setback, in addition to other consequences of tax debt that can be quite severe.
If notices from the IRS or a state-based tax agency regarding your tax debt go unanswered, you could be placed in automated collection and have either your wages or tax refund garnished, or possibly both. Further, interest and penalties will quickly rack up on top of your tax debt balance.
It could also get worse as unresolved tax debt can lead to the government seizing your assets or placing you under an international travel ban.
But, there are a few ways that you can resolve your tax debt, or even prevent it. First, you can file a request for an extension with the IRS, which will afford you six additional months to pay your tax bill before it becomes tax debt.
If that option doesn’t work, you can request a payment plan if you owe less than $50,000 to repay the debt in monthly installments. This option is good for consumers that would otherwise be unable to repay their balance in full within 120 days.
Other potential solutions to tax debt include checking to see if you qualify for an offer in compromise, which would reduce your overall tax liability if you are unable to repay the debt in full within three years through a payment plan. Or, you can request a “currently not collectible” status for your account, which means the IRS will not collect the money owed, nor seize your assets or income. However, interest will still accumulate on the tax debt and the IRS will probably apply your tax refund to pay off the debt.
Finally, if your spouse, or former spouse, improperly filed a joint tax return without your knowledge, it’s possible that the IRS will forgive your tax debt through innocent spouse relief.
Ideally, none of these solutions will be necessary for you after the 2020 tax season, but they are nonetheless good to know about as tax debt can quickly get out of hand as evident from the data.
As a research analyst at LendEDU, Mike Brown uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Brown’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.
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