The 2016 presidential race is already well underway, and there are plenty of candidates to choose from this time around. In any major election, taxes are an important topic and a sensitive issue for many Texans. Regardless of your opinions, you are legally obligated to pay the taxes you owe under current laws as a citizen of the United States.
When you do not pay your taxes, the Internal Revenue Service can be a very difficult opponent. The IRS has the authority to issue severe penalties and use powerful collection tools to obtain the money you owe. If you are an independent contractor, like a plumber, electrician, carpenter or mechanic, you could end up owing more than you should based on your income.
How does this happen?
- You get paid: Although the terms can vary greatly, you get paid for your work based on a contract. Generally, this is the cost of the completed project plus a percentage markup or flat fee.
- You pay your job-related expenses: You may be paid $50,000 for a project, but you do not take home the entire amount. You have to pay for labor and supplies. Your income is the flat fee or the percentage markup of the total cost. After adding up the cost of the materials and paying your employees or subcontractors, your take-home amount might be closer to $5,000.
- You do not file your tax return: Maybe you forget. Maybe you need the money to cover immediate business expenses. Maybe you are behind on your mortgage and prioritize keeping your home out of foreclosure over paying your taxes. There are many reasons why you might fail to file your federal tax return with your 1099s attached. This might even occur a few years in a row.
- The IRS files a substitute return: The IRS knows when you do not file your return and can even get its own copies of your 1099s. After a few notifications or a certain amount of time, the IRS can file a substitute return for you. The IRS fills in the blanks, and they generally are not favorable to the taxpayer. For instance, the IRS may use the total amount of the project to determine your taxable income. This means that the agency will assess taxes and penalties based on the $50,000 you were paid for the project, not the $5,000 you took home as income.
- You pay the tax liability: You will have to pay your unpaid taxes plus any interest and penalties, which can quickly add up. You can pay the liability voluntarily. If you do not, the IRS has the authority to levy your bank accounts or put a lien on your home.
Will the tax liability go away on its own? No. You will have to face the situation. Will you have to pay the full amount? Maybe not. You have options. In many cases, taxpayers are able to reduce the amount they owe or work out an affordable repayment plan. The best way to learn about your options is to talk to an experienced tax attorney.