We got a call the other day from a man whom I’ll call Al, who had an all-too-familiar tax problem. He hadn’t filed in about 5 years, and had substantial balances due. When I asked Al how he got into this predicament, he said that he had followed some “bad advice” from a friend at work.
Al works on the line at GM, and a co-worker had told him that by increasing your exemptions, you could take home a much larger paycheck. It sounded like a good idea at the time- who wouldn’t be tempted by some extra money each week? Al followed his friend’s advice and switched his exemptions to the maximum of 9, and his checks did indeed go up because practically nothing was being taken out for taxes.
Al only meant to do it temporarily to “catch up” on some things, but he began to get used to the larger checks, and before he knew it, years had gone by and he had never switched his witholdings back to the correct amount. Meanwhile, the IRS finally caught up to him and began sending him letters stating that he had huge tax balances due. Not only was he required to pay back the tax he owed, but the IRS imposed large amounts of interest and penalty, making the debt almost double the original amounts.
Al was stressed out beyond belief. He never intended to let things go this far, but he was afraid to address the issue because he knew he didn’t have the money to pay off the IRS. He ignored the certified letters because he just didn’t know what to do- he felt he was in over his head. Finally, when he received a Notice of Levy from his employer, he gave us a call to see what his options might be. We were able to figure out a solution to his problem that will allow him to get out from under the debt and start over with a clean slate.
It is never a good idea to claim exempt as a way to “catch up” on things or put extra spending money in your pocket. Eventually the IRS will discover the discrepancy and you will have a much larger problem on your hands. However, if you or someone you know is already in this situation, there are options, and you can start over. Don’t wait until the IRS places a levy on your wages- it is much better to address the issue yourself, before it gets to that point.