Millennials have endured some difficult financial situations in their lifetime. They were among the hardest hit by the economic recession in 2008, with many of them graduating college only to find they could not get a job. Add to that a significant amount of student loans, many found they had to move back in with mom and dad and put off buying a house or other major assets. Even those who did not return home typically rent rather than own. Due to a changing job market, many Millennials choose to work for themselves, freelance, or otherwise rely on contract work rather than a traditional job. These factors and others have put Millennials at a high risk of finding themselves in trouble with the IRS due to unpaid federal income taxes.
Contract Work Meets Lack of Tax Knowledge
Contract workers do not get their taxes automatically taken out of their income; instead, they should make quarterly estimated tax payments. An increasing number of Millennials take on contract work within a variety of industries, and they may find themselves making a good salary equal to or even exceeding what they would be able to get as an employee. However, few, if any, have adequate training filing taxes. Rather than turning to a tax professional or the IRS, they tend to ask family members and friends for advice. A recent survey by NerdWallet found that 34 percent of Millennial taxpayers’ go-to source for tax-related information was friends and family, compared to the national average of 19 percent. Only 27 percent turn to a tax professional, compared to 38 percent nationally. This could lead to them making mistakes on their tax return that could cost them tens of thousands of dollars.
Even those who work as an employee may not always handle their taxes correctly. According to the same survey, 80 percent of Millennials are anxious about their tax preparation, much higher than the national average of 69 percent. The most common fears they have is making a mistake, paying too much, or not getting the highest refund possible.
Still a Dependent
Another reason that some Millennials may make mistakes on their taxes, leading to significant tax debt, is that their parents may still consider them a dependent when filling out their tax return. This could lead to a Millennial taxpayer trying to claim a credit their parents have already claimed, such as an education or healthcare credit. When the IRS catches the mistake, it often leads to a bill for the Millennial taxpayer, one that he or she may not be able to easily afford.
Reliance On Digital Correspondence
The IRS largely relies upon the postal system, unlike most Millennials, who sign up for digital correspondence for everything. Because their bills and other important information arrives via email or other online accounts, they may not even religiously check their mail. On top of that, Millennials typically rent rather than own their home, so they may frequently move. If they do not forward their mail or update their address with the IRS, any bills or other correspondence may be lost in the shuffle. This could mean years pass before they even know that they owe money to the IRS. Even if they know about the debt, they may not remember to take action, since they will not see the letters the IRS sends to remind them. The penalty fees and interest that accrue may significantly increase the amount they owe to an overwhelming amount, making it even harder to deal with.
Many Millennials are dealing with student debt from both federal and private lenders and may also have outstanding credit card debt. Their focus is on paying back these debts, especially as they will more rapidly affect their credit score, according to Bloomberg. Until the IRS starts threatening real collective action, any tax debt they might have is in the back of their mind as they focus on ensuring they pay all their other bills and debt off first. Millennials also have fewer assets, so they do not feel as threatened by collective action as those who do have assets to lose, even though the IRS will still take some collective action.
Millennials may be at a very high risk of finding themselves with a federal tax debt that they cannot afford, but they are not the only ones who may find themselves owing more money than they can afford to pay to the IRS. If this is you, you can benefit from the tax relief programs set up by the IRS, such as Installment Agreements, Penalty Abatement, and an Offer in Compromise. The tax professionals at Fidelity Tax Relief can help you figure out the best action to take to reduce your federal tax debt. We work as your advocate to the IRS and find the best solution for your situation. We also help you to learn how to avoid falling into similar circumstances in the future. Download our eBook, 8 Ways to Reduce Your Tax Debt, today to learn more.