COVID Causing Tax Debt Issues That Can Get Worse in 2021

Americans struggling to repay their 2019 taxes in the midst of a recession has been just another issue to deal with during the coronavirus pandemic.

Recognizing this, the Internal Revenue Service (IRS) actually extended the filing and payment deadline for 2019 tax obligations from April 15, 2020, to July 15, 2020.

The extension may have temporarily stopped the bleeding, yet there’s a looming tax debt crisis that has the potential to boil over in 2021 when 2020 taxes are due.

That’s because millions of Americans took to relying on unemployment benefits, retirement funds, or stock sales to stay afloat amidst the pandemic recession.

All of those things could lead to a heavier tax obligation in 2021, and with many people still out of work and struggling to get by, the country could be looking at staggering tax debt numbers next year.

The U.S. tax gap (total outstanding tax debt) currently hovers around $400 billion, but that figure could approach crisis levels after next year’s tax season.

To capture the struggles from the 2020 tax season and also the fears regarding the 2021 tax season, LendEDU surveyed 1,000 adult Americans to better understand what the average taxpayer has been dealing with during these unprecedented times.

Observations & Analysis
How to Handle Tax Debt
Full Survey Results
Methodology

Note: If you would like a raw file of any data found below, or if you would like to see a specific breakdown (by age, state, gender, etc.), please email me at [email protected]

Observations & Analysis

All data is based on an online survey of 1,000 adult Americans commissioned by LendEDU and conducted by research firm Pollfish. The survey was conducted on December 1, 2020. For some questions, the answer percentages may not add up to 100% exactly due to rounding.

17% of Americans Laid Off Due to the Coronavirus Pandemic Were Unable To Pay All 2019 Taxes On Time

As mentioned above, the IRS extended the deadline to pay 2019 taxes by three months given the financial hardships experienced by many as a result of the coronavirus pandemic and recession.

However, paying all taxes owed by the July 15th deadline was still impossible for many Americans, especially those who have lost jobs due to the pandemic.

Amongst respondents who have lost their jobs during the coronavirus pandemic, 17% were not able to pay their 2019 taxes on time and in full.

Many Still Haven’t Filed Their Tax Returns, While Some Still Have Tax Debt Left Despite Filing

Even if you are unable to fully pay all tax obligations by the filing deadline during any given year, you should always file your tax returns on time.

When dealing with the IRS, a failure-to-file penalty is much worse (5% of unpaid taxes for each month your tax return is late, up to 25%) then a failure-to-pay penalty (.5% of unpaid taxes for each month you don’t pay, up to 25%).

Yet still, data from our survey found many Americans that couldn’t pay all their taxes on time also didn’t file on time.

32% of taxpayers who couldn’t pay all 2019 taxes on time didn’t file their taxes by July 15th either. Even worse, 72% of these taxpayers who missed the July 15th filing deadline still have yet to file their tax returns for 2019, which could lead to serious financial and legal troubles.

Amongst respondents who at least have filed their 2019 tax returns despite not being able to fully pay all taxes by July 15th, here’s how many have been able to finally repay all 2019 taxes owed…

With 53% of applicable taxpayers still having tax debt from 2019, we wanted to see how much they have left…

For American taxpayers that still have some amount of tax debt from the 2019 tax year, the average amount remaining is $3,662. Some people, however, have much higher tax debt balances, and there are specific options if you owe the IRS more than $10,000 in tax debt.

If you are someone that is currently repaying tax debt, you may want to learn more about tax relief as a possible way to settle or reduce your tax bill.

>>> Read More: Best Tax Relief Companies

Additionally, you could look into settling your tax debt with the IRS, which could be done with a few different options including an offer in compromise or installment agreement.

>>> Read More: How to Settle Tax Debt with the IRS

The data from our survey makes it clear that repaying 2019 taxes has been unusually tough, and mass unemployment brought on by the coronavirus pandemic has been a big reason for the struggles.

But the coronavirus pandemic’s impact on the tax system won’t end in 2020 and likely will be more damaging in 2021 as taxes from this unprecedented year will be owed.

Over Half of All Taxpayers Worried About Tax Debt Next Year Due to the Coronavirus Pandemic & Its Economic Impacts

The 2021 tax season is shaping up to be a brutal one as the full financial ramifications of the coronavirus pandemic and recession develop.

The majority of adult Americans, especially those who have lost their jobs at some point during the pandemic, are fearful about tax debt next year…

Amongst all taxpaying respondents, a combined 53% are worried about owing tax debt next year as a result of the coronavirus pandemic and its economic impacts.

However, the real story within the data to this particular question is what happens when the results are segmented to only include respondents that have been laid off at some point during the pandemic.

Within that cohort, a combined 76% are worried about having tax debt next year.

This could be due to unemployed respondents not having the confidence in their savings or general financial situations to cover tax obligations next year.

It could also pertain to the taxable unemployment benefits they have likely been collecting throughout the pandemic.

Americans Worried That Financial Maneuvers They Made to Stay Afloat May Lead to Larger Tax Bill in 2021

The coronavirus pandemic and recession put many Americans in dire financial straits.

Because of this, many people not only relied on unemployment benefits but also turned to more drastic measures like dipping into a retirement account or liquidating investments.

And according to our data, such maneuvers have applicable taxpayers concerned about their tax bill in 2021…

As the various charts above indicate, most taxpayers that had to do things like collect unemployment benefits or dip into a retirement account are concerned over their 2020 tax bill.

For reference, 19% of respondents borrowed money from a retirement account due to the pandemic recession, including 34% who were laid off. Additionally, 18% of respondents sold stocks or liquidated other investments due to the pandemic recession, including 30% who had lost their jobs.

Would any of these actions actually lead to a larger tax obligation when tax season rolls around next year?

While things are constantly changing due to the global pandemic, unemployment benefits are taxable on a federal level and in most states. So, unemployment benefits will likely lead to a larger tax bill in 2021 for those who received them.

The stimulus checks that came as part of the CARES Act aren’t subject to taxes, but since they are an advance on a person’s 2020 tax credit, they need to be reported when filing 2020 taxes. Still, tax debt stemming from stimulus checks shouldn’t be a concern.

Normally, any type of early withdrawal from a retirement account will get added to your income and thus subject to income tax, while also being subject to a penalty tax from the IRS. However, as a result of the pandemic, the IRS is waiving the penalty tax for early withdrawals up to $100,000 and is also expanding the window for paying the additional income tax. On this one, taxpayers will likely get a larger bill from Uncle Sam in 2021.

Finally, any stock that is sold for more than the investor paid for it is subject to a capital gains tax if the stock was held for at least one year. The capital gains tax rate is lower than the rate applied to other taxable income.

But, any profits from stock sales when the stock was held for less than one year will be taxed at the ordinary income tax rate. With many folks making impulsive market moves in the early months of the pandemic, stock sales could definitely become a big driver of tax debt in 2021.

Regardless of specific actions, it’s clear that paying 2020 taxes next year is going to be a mess for most and a struggle for those who had to resort to consequential financial decisions to survive the pandemic recession.

How to Handle Tax Debt

As suggested by this data and plenty of historical data, falling into tax debt is more common than you might think.

If you are someone who has fallen into tax debt, or are worried you might due to the coronavirus pandemic and recession, here’s what you should know about repaying back taxes.

Consequences of Tax Debt

Included amongst the most common consequences of tax debt is getting placed in automated collection by the IRS, which can lead to liens, bank account levies, and wage garnishment.

>>> Read More: How to Stop IRS Wage Garnishment

Additional punishments could include having your tax refund seized, interest penalties that will only add to your tax debt balance, having a revenue officer show up to your house, or in the worst case, having your passport restricted.

Work With the IRS

To get out of your tax debt, one option you have is to work with the IRS. There are multiple ways you are able to work with the IRS to repay back taxes, including setting up a payment plan or negotiating an offer-in-compromise.

Additionally, you could look into the IRS Fresh Start Program, which was launched in 2011 as a way to settle tax debts while avoiding severe penalties and consequences.

It may also be useful to find IRS audit representation in order to successfully navigate all of the complications and requirements that come with taxes, and more specifically, tax debt.

>>> Read More: Where to Find IRS Audit Representation

Work With a Tax Resolution Serivce

You may also want to consider working with a tax resolution service if you find yourself with tax debt as they may be able to help address issues like unfiled tax returns, liens, or audits.

Each company operates differently though and the cost of tax resolution services will vary greatly as a result. For this reason, be sure to compare tax relief companies before making a final decision.

Full Survey Results

Note: If you would like a raw file of any data found below, or if you would like to see a specific breakdown (by age, state, gender, etc.), please email me at [email protected].

1. Due to the coronavirus pandemic and its economic impacts, were you able to successfully file and pay all 2019 taxes owed by the extended July 15th, 2020 filing deadline?

86% of respondents answered, “Yes”
10% of respondents answered, “No”
5% of respondents answered, “I’d rather not say.”

2. (Asked only to those who answered “No” to Q1) Even though you were unable to repay all 2019 taxes by the July 15, 2020 filing deadline, did you still file your tax returns by that date?

65% of respondents answered, “Yes”
32% of respondents answered, “No”
3% of respondents answered, “I’d rather not say.”

3. (Asked only to those who answered “No” to both Q1 & Q2) Have you filed your 2019 tax returns at all?

28% of respondents answered, “Yes”
72% of respondents answered, “No”
0% of respondents answered, “I’d rather not say.”

4. (Asked only to those who answered Q2 or also answered “Yes” to Q3) Have you since repaid all tax debt owed from the 2019 year after not fully repaying your 2019 taxes by July 15th, 2020?

46% of respondents answered, “Yes”
53% of respondents answered, “No”
1% of respondents answered, “I’d rather not say.”

5. (Asked only to those who answered “No” to Q4) How much tax debt do you have remaining from the 2019 tax year?

The average amount of tax debt remaining was $3,662.

6. (Asked only to those who answered Q2 or also answered “Yes” to Q3) Did you enter into one of the following agreements with the IRS to help settle your tax debt?

21% of respondents answered, “Online payment agreement”
24% of respondents answered, “Installment agreement”
13% of respondents answered, “Temporarily delayed collection”
3% of respondents answered, “Offer in compromise”
7% of respondents answered, “Something else”
26% of respondents answered, “I did not reach out to the IRS.”
7% of respondents answered, “I’d rather not say.”

7. Due to the coronavirus and its economic impacts, were you laid off from your job?

27% of respondents answered, “Yes”
70% of respondents answered, “No”
3% of respondents answered, “I’d rather not say.”

8. (Asked only to those who answered “Yes” to Q7) Due to getting laid off during the coronavirus pandemic, did you receive unemployment benefits?

66% of respondents answered, “Yes”
33% of respondents answered, “No”
1% of respondents answered, “I’d rather not say.”

9. (Asked only to those who answered “Yes” to both Q7 & Q8) Are you concerned you may owe more taxes next year due to receiving unemployment benefits?

70% of respondents answered, “Yes”
26% of respondents answered, “No”
4% of respondents answered, “Not sure/I’d rather not say.”

10. Are you worried about tax debt next year due to the coronavirus and its economic impacts?

24% of respondents answered, “Yes, very worried”
29% of respondents answered, “Yes”
27% of respondents answered, “No”
15% of respondents answered, “No, not at all”
6% of respondents answered, “Not sure/I’d rather not say.”

11. In response to the coronavirus pandemic and its impacts, did you receive a one-time stimulus check as part of the CARES ACT?

82% of respondents answered, “Yes”
16% of respondents answered, “No”
3% of respondents answered, “I’d rather not say.”

12. (Asked only to those who answered “Yes” to Q11) Are you concerned you may owe more taxes next year due to receiving a stimulus check?

46% of respondents answered, “Yes”
44% of respondents answered, “No”
9% of respondents answered, “Not sure/I’d rather not say.”

13. Due to the coronavirus pandemic and its economic impacts, did you borrow money from a retirement account to cover expenses?

19% of respondents answered, “Yes”
79% of respondents answered, “No”
2% of respondents answered, “I’d rather not say.”

14. (Asked only to those who answered “Yes” to Q13) Are you concerned you may owe more taxes next year due to borrowing from a retirement account?

78% of respondents answered, “Yes”
19% of respondents answered, “No”
3% of respondents answered, “Not sure/I’d rather not say.”

15. Due to the coronavirus pandemic and its economic impacts, did you sell stock or liquidate other investments?

18% of respondents answered, “Yes”
80% of respondents answered, “No”
2% of respondents answered, “I’d rather not say.”

16. (Asked only to those who answered “Yes” to Q15) Are you concerned you may owe more taxes next year due to selling stock or liquidating other investments?

72% of respondents answered, “Yes”
22% of respondents answered, “No”
6% of respondents answered, “Not sure/I’d rather not say.”

Methodology

All data found within this report is based on a survey commissioned by LendEDU and conducted online by survey platform Pollfish. In total, 1,000 adult Americans were surveyed. The appropriate respondents were found via Pollfish’s age filtering feature. This survey was conducted on December 1, 2020. All respondents were asked to answer all questions truthfully and to the best of their abilities.

See more of LendEDU’s Research here.

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