One Way To Wind Up With A Tax Debt Problem

Posted on 25. Sep, 2011 by in IRS

If you are a person who lacks good judgment or is always trying to game the system, you could find yourself with a tax debt problem.

Once this happens, a tax debt problem can easily mushroom into related problems, whether they are of a financial or a personal nature.

There are numerous ways in which you can dig a whole that leads to a tax debt problem with the Internal Revenue Service. You may have failed to file a return, under-reported income, or taken an improper credit on your income tax return.

Such things can result in owing back taxes, interest and penalties.

A case in point could involve the Earned Income Tax Credit or EITC.

The EITC is a refundable federal income tax credit for low- to moderate-income individuals and families. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for it.

A failure to properly understand the applicable rules for claiming the EITC is a sure path to a future tax debt problem.

There are rules regarding what constitutes earned income; qualifying child rules (such as relationship, age, residency and joint return tests); rules for workers without a qualifying child; and special rules for members of the military, ministers, members of the clergy, those receiving disability benefits, and those impacted by disasters.

Some 24 million taxpayers received $55 billion through the EITC for tax year 2009.

According to the Treasury Inspector General for Tax Administration, 23% to 28% of the EITC claims are issued improperly each year. In fiscal year 2009, this equated to between $9 billion and $11 billion in EITC improper payments. These are the seeds of a tax debt problem.

So, do you think IRS is just going to forget about this massive amount of improper payments, especially with Congress breathing down the agency’s neck? Don’t bet on it.

To avoid creating a tax debt problem because of the EITC, you should either learn the rules or hire a certified public accountant (CPA) or other paid tax preparer to complete your income tax return.

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