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Opinion: Avoid tax debt in 2020

Michael Brown

Tax debt, or the difference between taxes owed and taxes paid, is quite significant in the United States, yet for some reason it flies under the radar in comparison to the more glamorous debt categories like student loan or mortgage debt. 

In a recent report, LendEDU and media company Solvable worked together to analyze over 75,000 unique cases of tax debt to better understand how this financial problem is impacting the U.S. on a state-by-state level.

The Internal Revenue Service building in Washington.

According to the study, the nationwide average tax debt is $16,849, which is more than the $16,061 in credit card debt that the average American household carries. Further, the report estimates that the total outstanding tax debt when both federal and state tax debt are combined is a substantial $527 billion. 

“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,” says Wade Schlosser, CEO of 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 the state of Michigan, LendEDU’s report found the average tax debt to be $18,199, which placed the state 33rd when ranking each state and Washington D.C.’s respective tax debt from lowest to highest. 

Michigan’s figure fell in line with regional trends, which saw states in the Northeast, Midwest, and West have high average tax debt while Southern states had lower tax debt. 

For Michiganians, the main reasons they fell into tax debt included owing more than expected (15.40%), not filing taxes (14.03%), and getting hit with back tax penalties (13.49%). This follows national trends, as those were the three most common reasons for tax debt across the country.

For a tax debtor, there are options available that can alleviate the stresses caused by tax debt. Generally, both the IRS and state tax agencies are willing to negotiate a tax settlement for only a portion of the money owed. Or, someone that has fallen into tax debt can try filing a request for an extension with the IRS to buy themselves more time, usually six months, to settle their personal finances and fix the issue. 

With tax season around the corner, now is the time for Michigan residents, as well as all Americans, to get both their finances and necessary documents in order to avoid getting buried by tax debt. As the data shows, tax debt can become quite considerable for the everyday consumer; $16,849, or even $18,199 as a Michigan resident, can certainly hamper a life for years and block someone from achieving other financial milestones. 

As Americans, many of us deal with numerous forms of consumer debt, mainly that from a mortgage, but also from student loans or credit cards. Pile tax debt on top of those and it can very well be the straw that breaks the camel’s financial back. Tax debt can generally be avoided so prepare for this year’s tax season diligently and don’t let it be your back that is broken. 

Michael Brown is a research analyst with LendEDU.