The Tax Mistake That Cost Me Thousands

Cheryl Lock
Posted

When my pay was direct-deposited into my checking account every two weeks while I was working my first full-time freelance job, I’d think, “Wow, that’s a decent amount of money. I can totally live off this!”

No one ever told me (and I never bothered to ask) why my paycheck seemed so large, so I lived it up for an entire year—eating out, going to plays, buying new clothes and taking trips.

Then April rolled around: tax time. In all fairness, I knew that I hadn’t been paying taxes on the money I was making as a freelancer. I just had no idea how much I actually should have been setting aside from each paycheck. I now know that I should have been saving at least 33% to 35% of every paycheck to put toward taxes. Hindsight … you know what they say.

In the end, I owed a little over $3,000. My accountant practically cried when she gave me the news—and a full-blown panic attack.

Well, it turns out that I’m not the only one befuddled by taxes—especially now that the new tax laws have been put in place for 2013. We found three readers to share their own horror stories in the hopes that maybe, just maybe, it will never happen to you.

The $40K Bill Bombshell

In 2010, Heidi Saucedo’s husband was working in Egypt for two months. While he was away, Saucedo received an envelope from the IRS, which revealed a bill for $40,000.

“After I picked myself up off the floor, I had to contact the hubby … by Facebook chat,” she says. “Can you imagine going through all the back-and-forth required for that via chat?”

The problem was that Heidi and her husband had not filed a tax return in five years, since money was tight while she stayed home with their two children. “I just didn’t understand that we could possibly owe nothing—I thought we would be charged for everything we owned,” Saucedo says. “I knew this was foolish, but we were living paycheck to paycheck, and we were too proud to ask for assistance.”

Her husband was also working under a 1099—meaning that he wasn’t a full-time employee, so he was taxed at the end of the year instead of out of every paycheck. “Apparently, I had ‘known’ this (my husband says that we discussed it), but to this day, I swear I had no clue,” Saucedo says.

After using TurboTax to figure out the tax deductions that hadn’t been included in that $40,000 bill (like standard deductions and the child tax credit), it turned out that they didn’t owe anything. “At the time, I chose not to go to a professional since the gist of the letter from the IRS was that all we needed to do was file our taxes,” Saucedo says. “I was pretty overwhelmed, and I didn’t have any money to pay a CPA, so I signed up for TurboTax.”

“The good thing was that when I began the search for anything and everything that I could get my hands on to rectify the situation,” Saucedo adds, “I realized that I love doing taxes. Never again will there be an unfiled return!”

  • Caitlin

    How do you not remember to file your taxes? After 5 years? Everyone does it every year. I don’t feel sorry for anyone that this happens to. It’s just negligent! 

    • Marie

      I agree. I want to be sympathetic but how do you just not file your taxes even once, let alone for years?! Did they think that wouldn’t catch up to them at some point? I’m actually surprised it took 5 years. I would be having nightmares if I was even late on my taxes.

    • Cathy

      What I find more alarming is that it seems she had no grasp of anything financial regarding her home or family (income, taxes, etc) AT ALL. Even if only one parent works, both parents should be clear, understand, and be involved in decision making regarding family finances – including taxes, various insurances, 401K, etc. What if something were to happen to your spouse? Would you even know where your savings were, or what your insurances covered? Or if there was some kind of 401K? This is especially important if you are a freelancer, and have to provide your own insurance, 401K etc. Seems very irresponsible to me, especially if you have children who would rely on you. 

      • Colleen

        Seriously… if they don’t concern themselves enough to file their taxes (the most basic financial thing out there) I’m pretty sure the rest of their financial house is not in order.  And do they think the IRS isn’t going to care?
        “In this world nothing can be said to be certain, except death and taxes.”  Ben Franklin

  • abc123

    Why didn’t Jose file an amended form?  This is just silly. Like H&R block says, give it a second look.

    • http://twitter.com/latinAbroad A Nomadic Translator

       my thoughts exactly

    • Itskodywithak

      I filed with H & R Block, and ended up having to file an amendment. I guess amendments can be tricky because they made an error, so when the city audited me I owed. H & R Block is supposed to pay for their error. It has been 6 months and they are dodging me like the black plague.

      • http://www.taliashewrote.com thdpr

         Yeah, amendments kinda suck. I had to file one last year because I forgot about 1099 income (it was in Jan of ’11 … forgot I did the freelance work by April of ’12) and she only sent me the 1099 in August of ’12… They are a pain to file and then I get like 30 conflicting letters from the IRS… The IRS is a mess!

    • Cathy

      Yeah…don’t you have like 5 or some odd years to either file or make amendments on any tax return? I don’t believe that he “lost” money on a tax return after only two months. Would be nice if the author would clarify that….

      • Tojada

        You have three years to amend a return from the date it was due.  So if you have to amend your 2012 tax return, you have until April 15, 2016 to do it.

  • Colleen

    I really have no sympathy for anyone who doesn’t file taxes.  And for 5 years?!  She doesn’t understand how a 1099 works?  When I read stories like this of people who are so upset after doing irresponsible things like this they never acknowledge how selfish they are.  There is never a “I felt terrible realizing that all my friends and neighbors were paying taxes to pay for all the government services and infrastructure that I use while I was not.”

  • Particularp

    We end up paying about $3,000 in additional taxes during tax time despite having the maximum withheld because we choose not to have children yet and we no longer own a house since we moved to another state. We also don’t have college loans. So we have to pay more. Yet there are few to no public services we ever use (I can’t think of any since the police are useless here). It’s unfortunate.

    • Sara

      YOU need this read this comment below:

       ”However, if you think you’re not “using government services” take a quick
      trip to a failed state and you will see people who really have no
      government services. Like clean drinking water? Enjoy being able to buy
      safe foods? Don’t have to pay a bodyguard or militia to keep you alive?
      No more polio in your country? Able to travel freely on safe roads?
      Thanks, government services!”

    • Saraaustin

      Do you drive on roads?  Cross bridges?  Expect the fire department to come if your house is on fire? Everyone uses public services. 

  • talia

    Really, not paying taxes for 5 years! Were they living under a rock?! I am having a hard time feeling any sympathy. I can understand filing for an extension, but not filing at all?? So confused….

  • http://thekimberlydiaries.com/ the kimberly diaries

    I cashed out my 401k and didn’t realize that only federal taxes had been taken out so I owed a lot of money one year, but I was able to pay it off in installments.

    Also.. saying you almost threw your iPad in the ocean is a surefire way to make us NOT feel sorry for you. 

  • Jenn

    I paid 5K in taxes when I was only making 26K on a 1099….and I owed nearly the same amount making 46K on a W2. I will never work on a 1099 again. People need to make sure the company can legitimately file you as a 1099, I know many people that are getting taken advantage of these days.

    • Milt

      A substantial portion of the taxes on your 26k was social security and medicare.  You had to pay both your share and the employer’s share.  On the 46k that money was already taken out (an part paid by your employer) so it wasn’t included in the taxes that you had to pay.  Taxes aren’t any greater for 1099s other than having to pay the employer’s share of social security.

    • Guest

      Thank you for the info. you provided. I am on SS Disabity but will pass this on to my Grand Children and friend’s/ This has never question my “mind”,ha ha,well what’s left of it. Have a good day…year !

  • Sarah Egolf

    This is a story of *how* people *became* aware. No need to criticize their blissful ignorance beforehand. However, if you think you’re not “using government services” take a quick trip to a failed state and you will see people who really have no government services. Like clean drinking water? Enjoy being able to buy safe foods? Don’t have to pay a bodyguard or militia to keep you alive? No more polio in your country? Able to travel freely on safe roads? Thanks, government services!

  • jill4444

    This story was useless.  The only lesson it provided, and one that I already knew:  Don’t feel sorry for people who create their problems by being stupid.  I thought this website was created to give real and useful tips about money?

    • PG

       I disagree – I have worked in a big 4 accounting firm for the past 10 years and my taxpayers are all in finance and I have had several instances where these highly compensated and supposedly financially savvy individuals were flummoxed by taxes, even by the fact that they need to file tax returns (when not working/living in the US).  So I see it all the time and don’t blame the avg person at all – most of my friends (who have been long in the workforce and in their 30s) often freak out about and have very little knowledge surrounding Fed and state taxes and all the various tax forms that they should be anticipating and reporting.

  • JP

    Here’s a tax mistake that I wasn’t aware of till it happened to me. I was in a domestic partnership to provide my partner with health insurance. I was then taxed on his health insurance. It was something I wasn’t informed about until it was too late. Overall the amount I was taxed was cheaper than what would have been spent on him being self insured for the whole year, but it was still a large unexpected expense.

  • Mjacques13

    To Jose Vera – just do an amended return with correct date, get to keep that thousand dollars

  • Madebyheart6

    That is when you file an amended tax return to get the deduction for the other dependent!!  Don’t just accept IRS problems when they are against you!!

  • Tojada

    To a lot of folks, taxes are as foreign as a black hole in the Milky Way.  I did tax returns for a number of years and encountered a good representation of the population and found that a majority just have no clue.  Many want to know why they didn’t get as much as their neighbor.  Tax returns are as different as our DNA. And a great many of them are done incorrectly and never corrected.  Also, many people believe that taxes are only a concern come April.  They should be a concern all year long, especially if you are self-employed in any way. 

  • Ted Jenkin

    If you go into tax season saying three hail mary’s that you hope your CPA is going to get you a refund, then you have already missed the boat. Don’t pay someone to do your taxes if they don’t give you any proactive tax management advice. Yes, a mistake can cost you dearly but a great strategy can save you thousands in unpaid taxes. You decide . . . .www.oxygenfinancial.net

  • Nawatramani

    What exactly is this article supposed to teach me? Pay your taxes every year? Make sure you check and double check the information before you file? Talk to an expert when you have major life changing events like a divorce or a death in the family?

    I am trying to figure out exactly what is the purpose of this article other than letting us know that there are people out there who are clueless about the fundamentals of personal finance and/or the current state of their finances.