More Money, More Problems?

Reclusive former superstar singer Lauryn Hill made headlines this week, when news broke of a recent federal criminal information charging her with failure to file federal tax returns on $1.8 million in income she earned from 2005 through 2007.  Along with fame (and, at some point, fortune), celebrities Wesley Snipes, Nicholas Cage, Floyd Mayweather, Val Kilmer, and Marc Anthony have something else in common with Hill – at some point in their professional lives, they all failed to pay their federal and/or state income taxes. As a result, these stars have at one time or another had a combined tax liability of over $10 million.

The first question many of us ask when we learn of these stars' failures to pay their taxes is how people with such significant earnings could lack the funds to satisfy their tax liabilities. While there are likely many different explanations as to why they were unable (or unwilling) to pay their taxes, one problem many people with high and even moderate incomes sometimes face is failure to comply with – or perhaps fully understand – the federal estimated tax deposit system.

Taxpayers often fail to realize that if they either:  (1) owed money to the IRS at the time of filing their most recent tax return, or (2) expect to owe more than $1,000 at the time of filing their upcoming return, they generally are required to make quarterly estimated tax payments to the IRS in the current year. The purpose of these estimated payments is to ensure that any tax liability is either already paid in full or reduced to the point that it can be easily paid at the time the tax return is filed.

Estimated tax requirements are not only applicable to the wealthiest of individuals. In fact, whether someone is required to make estimated tax payments has little to do with how much they earn, but everything to do with the type of income they receive. Most people subject to the estimated payment requirements earn income from sources other than standard wages, such as from self-employment, liquidating investment accounts, or selling other assets. Because federal income taxes may not be withheld from these types of income, they generate unpaid tax liabilities.  If taxpayers receiving these types of income do not remit the required deposits to the IRS or utilize proper tax planning, they may have a significant tax liability at the time of filing their tax return with no ability to pay it.

Use of this quarterly deposit system is not discretionary, but mandatory; therefore, failure to meet the IRS's requirements will result in the assessment of penalties and interest, which will make paying your balance due to the IRS even more difficult.  If a balance goes unpaid for too long, the consequences can range from harassing phone calls and letters from the IRS, filing of federal tax liens (which are public records), IRS seizure of financial accounts and wages, or even criminal charges.

To avoid these negative consequences, do not make the same mistakes so many celebrities and professional athletes make.  Be sure that you follow all IRS requirements, including payment of estimated tax deposits, if necessary. If you have any questions regarding your estimated tax obligations or any federal or state tax issue, be sure to consult an attorney before making a mistake that could cost you unnecessary time and money. 

Have a legal question you'd like to see answered in a future article?  Email it to me at hgwalser@lavellelaw.com

Disclaimer:  This article provides legal information of a general nature and is not intended as legal advice, nor does it create an attorney-client relationship with any person or group of persons.  Should you wish to obtain legal advice concerning your particular situation, contact an attorney.