Common Mistakes That Lead To Tax Debt, And How To Avoid Them

Paying taxes is a responsibility that most citizens share. However, while it seems straightforward enough, there are multiple pitfalls that can lead to unexpected tax debt. For some, these mistakes can accumulate over the years, leading to an overwhelming amount of debt that feels impossible to clear.

Thankfully, there are ways to prevent these missteps and maintain a clear record. Below, we delve into some of the most common mistakes leading to tax debt and how to navigate around them.

Filing Taxes Incorrectly Or Not At All


One of the primary reasons people end up with tax debt is either filing their taxes incorrectly or not filing them at all. This can be due to oversight, procrastination, or simple ignorance.

By neglecting to file, or doing so inaccurately, you accrue penalties and interest on top of what you owe. And these additional costs can add up over time, turning a small debt into a substantial one.

To avoid this:

  • Ensure you file your taxes every year, even if you believe you owe nothing.
  • Make use of tax software or professional tax services to ensure accuracy. If you’re unsure about your tax situation, especially if you think you might owe back taxes, consider consulting with tax relief services. They specialize in helping individuals navigate their tax problems, potentially reducing penalties or setting up manageable payment plans.

Underestimating Self-Employment Taxes

Self-employed individuals often underestimate their tax liabilities. Unlike salaried workers where taxes are often deducted automatically, self-employed individuals need to make estimated tax payments throughout the year.

To avoid this:

  • Familiarize yourself with the self-employment tax rate.
  • Set aside a portion of your income regularly for taxes.
  • Make quarterly estimated tax payments to avoid year-end surprises.

Ignoring IRS Notices

Ignoring letters and notifications from the IRS is a surefire way to increase your tax debt. The IRS sends out notices for a variety of reasons, from simple notifications to warnings about impending actions.

To avoid this:

  • Always open and read IRS letters immediately.
  • If you don’t understand the content, consult a tax professional.
  • Respond timely to any requests for information or payments.

Withdrawing From Retirement Accounts Early


Taking money out of retirement accounts before the age of 59½ usually incurs additional taxes and penalties. These withdrawals can be tempting, especially in times of financial strain, but they often lead to larger tax debt.

To avoid this:

  • Consider other sources of funds before touching retirement savings.
  • If you must withdraw, ensure you understand the tax implications and set aside money for the inevitable tax bill.

Not Reporting All Income

All income, whether from a salaried job, freelancing, or other sources, is taxable. Failing to report all of it can lead to penalties and interest on top of the unpaid tax.

To avoid this:

  • Keep thorough records of all income sources.
  • Include everything on your tax return, even if it didn’t come with a formal tax document like a W-2 or 1099.

Claiming Incorrect Deductions Or Credits

While deductions and credits can reduce your taxable income, claiming ones you’re not eligible for can backfire. This mistake can lead to an audit and subsequent penalties.

To avoid this:

  • Always double-check eligibility criteria for deductions and credits.
  • Maintain documentation that proves your eligibility.
  • When in doubt, consult with a tax professional.

Not Setting Up Payment Plans

If you find out that you owe the IRS money and cannot pay the full amount immediately, it’s better to set up a payment plan rather than ignore the debt.

To avoid further debt:

  • Contact the IRS as soon as you know you can’t pay in full.
  • Inquire about setting up a payment plan or an Offer in Compromise.
  • Always make payments as agreed to avoid additional penalties.

Neglecting State And Local Taxes


While federal taxes often take center stage, state and local taxes can also accumulate and cause a burden if overlooked. Each state may have different tax rates, deductions, and deadlines, and neglecting these can lead to additional debt.

To avoid this:

  • Familiarize yourself with state and local tax codes.
  • Dedicate time to fill out state tax returns alongside your federal return.
  • When relocating to a new state, research its tax obligations to ensure you remain compliant.

Failing To Update Personal Information

Major life events like marriage, divorce, having children, or even moving to a different address can influence your tax obligations. Failing to update these details can lead to inaccuracies on your tax return, which might result in penalties.

To avoid this

  • Notify the IRS of address changes promptly.
  • Adjust tax withholdings and filings to reflect life changes, such as a new marital status or dependents.
  • Review and update beneficiary information, especially post-divorce.

Overlooking Foreign Income

U.S. citizens and resident aliens are taxed on their global income, not just what they earn within the country. Failing to report foreign income can lead to substantial penalties.

To avoid this

  • Declare all foreign income, including wages, interest, dividends, and rental income.
  • Familiarize yourself with the Foreign Tax Credit, which might reduce double taxation.
  • If you have foreign bank accounts or assets, be aware of the Foreign Bank Account Report (FBAR) requirements.

Misclassifying Workers

For business owners, misclassifying workers as independent contractors instead of employees can result in missed social security, Medicare, or unemployment taxes. This mistake can lead to hefty fines and back taxes.

To avoid this

  • Understand the criteria set by the IRS to differentiate between employees and independent contractors.
  • Ensure all workers are correctly classified from the start.
  • Periodically review worker classifications, especially when roles or relationships change.

Not Reviewing Past Returns For Errors


In the rush to meet tax deadlines, errors can slip into tax returns. Sometimes, these errors could be in your favor, meaning you’ve overpaid, while in other situations, they might mean you’ve underpaid and thus owe the IRS money. Past errors can result in audits, penalties, or accumulated debt if left unaddressed.

To avoid this

  • Set aside time annually to review the previous year’s return. Compare it with the current year’s documents to catch discrepancies.
  • If you discover an error, consider filing an amended return using Form 1040-X.
  • Seek the assistance of a tax professional when in doubt, as they can provide a more detailed review and ensure you are compliant in every area.


Nobody enjoys thinking about taxes, let alone tax debt. However, by being proactive, informed, and seeking help when needed, you can avoid the most common pitfalls that lead to tax debt. Remember, it’s always easier to prevent a problem than to fix one, and when it comes to taxes, knowledge and timeliness are your best allies.