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After paying off $81,000 in student loans, I was elated to be debt-free. While I worked hard at repaying my student loans, I had a “debt-free dream list” of things I was going to do when I was debt-free. One thing on the list was moving back to Los Angeles and leaving the rainy hipster utopia of Portland, Oregon.
In 2016, I moved back to LA, was debt-free and also self-employed! I felt like I accomplished so much and thought “it’ll be smooth sailing from here”.
Upon moving back, I had to fill out a tax registration form for my business. I filled it out, sent it in, and happily crossed it off my to-do list.
A few months later, I get a letter from LA county that I owed $10,000 in back taxes from 2014 and 2015. I knew this was a mistake as I wasn’t even living in Los Angeles at that time so how could I owe taxes? Perplexed, I called the finance office to fix the situation.
As it turns out, I had made a simple tax mistake. On the form, it asked me when I started my business. I answered honestly and said 2014, not realizing they meant when did I start it in California, which was 2016. That one tax mistake triggered a back tax notification. I was told to write a letter explaining my tax mistake and it would be handled. So I wrote the letter, sent it and moved on.
Six months later I get a menacing call. “Is this Melanie Lockert at [address]?” At first, I wanted to hang up thinking it was a scam but when they said my address I stayed on the line.
I hesitantly replied, “Yes.”
“I’m calling on behalf of the City of Los Angeles as you owe $10,000 in back taxes,” the woman on the phone said.
She explained that she was with a debt collection agency and demanded that I pay. I told her that I was up-to-date with my taxes and that this was a mistake. She grilled me as if there were no way that I was wrong. I now understood how aggressive and downright vile debt collectors could be.
I ended the call by saying it was a mistake and that I was going to follow-up with the City of Los Angeles directly. After dealing with more bureaucracy, I finally got someone on the phone. As they went through my file, they saw that I wrote the letter explaining the error many months earlier and apparently it was never processed.
Once it was processed, I made sure to get a written confirmation that I did not have any tax liability in case anyone came hounding me again.
That one simple tax mistake took up so much of my time and I had to go through a lot of hoops to get it resolved.
I thought I was done with simple tax mistakes, but no. Last year, I made a gaffe when making my quarterly payments. As a self-employed person, I pay taxes quarterly so when I made my January payment, I put the current year.
Five months later, I get another letter saying that I owe $5,500 in taxes for the previous year. I work with an accountant to make sure I am paying what I should be, so I was confused. How could this be?
I called him and we figured out the tax mistake. The $5,500 was the amount that I had paid in January. I had put that current year — you know at the start of a year you are adjusting to writing the new year — and forgot that January payments are actually applied to the year before. So I should have put the previous year and not the current one. Once again I had to write a letter, mail it and it took weeks of processing to get it cleared.
So what have I learned from these very simple errors that could have cost me thousands of dollars?
1. Keep good records
In each of these cases, I had my own records to refer back to. I knew that this was a mistake and had the proof on hand. When I got things cleared up, I made sure to get everything in writing on letterhead so if there were issues again, I had further proof that I was cleared of responsibility.
2. Be very detail-oriented
I consider myself to be pretty detail-oriented and these two instances happen to be simple mistakes. Now I know better. But it’s so easy to make a simple mistake, put a wrong number, etc. When doing anything tax related, slow down, be very detail-oriented and get help with an accountant or professional if needed.
3. Be thorough with your research
When I received the two tax bills, I took an extra step to see what they were all about. I had a feeling they were wrong and didn’t want to just hand over thousands of dollars. I could have just paid it and be done with it but I was diligent and asked questions.
I realized there was an error and took all the required steps to make it right so that I could keep my money and be in good standing with the IRS.
No one will care about your money like you do. If you have even a slight concern with a tax bill, do your due diligence to make sure it’s correct before handing over any money. Given my situation, it was clear there was an automatic system that triggered these notifications.
They could have easily verified that I did not live in California in 2014 and 2015 but instead my response on the tax registration form triggered a notification that I owed thousands of dollars in back taxes.
4. Work with an accountant
I think all self-employed folks should work with an accountant. My accountant was able to help me trace the second mistake as I was scratching my head over where we went wrong. The IRS makes mistakes. Your state tax board can make mistakes. Yes, your accountant can make mistakes too, but they have your back if any tax issues come up and can help you get it sorted.
I never thought I’d deal with a debt collector but one simple tax mistake changed that. Now that tax season is coming up, you want to work carefully to get your finances and tax return in order so you can avoid some of the hassles that I experienced.
Melanie Lockert is a personal finance expert, the blogger behind DearDebt.com and author of the book “Dear Debt: A story about breaking up with debt.” Melanie paid off $81,000 of debt and is now on a mission to help others do the same.
Feature Image: Twenty20
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