How to Deal with Back Taxes
I got a call from a debt collector about back taxes and here’s what I did next.
In April 2017, my husband and I filed our state and federal taxes as usual. For the first time in years, we were due a refund because we overpaid our Virginia (VA) taxes in 2016. Once we filed our taxes electronically, we patiently waited for the windfall to hit our bank account.
About three weeks later, we received a letter in the mail which asked,
DID YOU FILE A VIRGINIA INCOME TAX RETURN?
We received a 2016 tax return filed with your name and/or social security number. We have stopped this return for additional review… to be sure that refunds go to the right person.
A little odd I thought, but I was glad to see the state of Virginia was going an extra mile to protect my identity. They requested copies of our 2016 pay stubs, W-2 forms, bank statements, and other documentation used to complete our taxes. I was not happy about the additional hurdles we had to go through to get our money, but I started gathering the requested information anyway.
Before I had a chance to finalize the documents requested, I got the call.
“Hello may I speak to Rudolph Escarne?” said the stranger.
As you can imagine, I was confused since this stranger called my cell phone asking for my husband.
So, I replied, “Rudolph is not here right now, but this is his wife. How can I help you?”
“Hi my name is Mr. Debt Collector, and I am calling on behalf of the Virginia Department of Taxation. You and your husband owe $14,000 in back taxes — how would you like to pay?”
“Back taxes?” I said very confused.
“Yes, you and your husband owed $8,000 to the State of Virginia in 2012, but with penalties and interest, the amount due is now $14,000. If you do not pay the state may begin deducting money from your pay checks.”
This comment caught me by surprise but also peeked my interest. So, I asked follow up questions and then, he provided me a phone number for Virginia’s Department of Taxation so I could confirm the claim myself.
Who I Called Next
I immediately called my husband and reenacted my conversation with Mr. Debt Collector. We both thought this was a scam but I decided to call the Department of Taxation just in case. Although, Mr. Debt Collector provided me the number I still looked it up myself. I felt it was best to trust but verify all the information he said.
When I called the Department of Taxation a frank woman with an attitude answered the phone. I asked her why we didn’t receive a letter stating we owed back taxes, and also explained we could not possibly owe VA taxes for 2012 since we did not live there at the time.
Her response was very simple, “The past due taxes are in our system. You owe $14,000, and to dispute this claim you need to provide proof that you paid taxes in 2012 and to which state. Please fax or mail in your response and then we have 30 days to reply.”
Burden of Proof
As the employee of the Department of Taxation noted, the burden of proof was on me and my husband. What made our story particularly strange is that my husband had not lived in VA since 2004.
We got married in 2008, and from that year forward filed joint tax returns and paid Maryland taxes. Then, in August of 2012 we moved to Dubai, United Arab Emirates, where we lived for the next three years. While we lived abroad we continued to pay state taxes to Maryland. So, you can imagine, how we both thought it was very bizarre for VA to think we owed them any taxes.
Never Get Rid of Tax Records
My husband called the Department of Taxation again and got a much nicer customer service representative. This representative gave us a better explanation for the back taxes claim. Apparently, my husband was randomly audited by VA in 2015. Since they had no record of him filing taxes since 2005, VA took the liberty of using his federal tax return to calculate an estimate of what he would have owed them had he filed state taxes and sent him a letter about his tax bill to an old address.
Fortunately, we keep electronic records of all our taxes filed and still had a record of 2012 taxes paid to Maryland. This precious document, plus copies of our 2012 W-2 forms, was all the proof we needed to show 1) we filed state taxes 2) we were Maryland residents in 2012. I mailed everything off and let the 30-day response clock begin.
The Zero-Balance Bill
As much as I wanted the State of VA and the collection agency to issue me a public apology for the undue stress and anxiety they caused me, all I received was a zero-balance bill in the mail. The $14,000 balance we owed was adjusted to zero and no action further was required from us. No explanation or apology; however, you better believe I kept this letter for my records.
Shortly afterward we received our 2016 tax refund. Turns out when the state owes you money, they double check twice before they send it — just in case you owe them more.
- Answer Mr. Debt Collector’s call, he might tell you important information.
- Keep tax records forever.
- Verify letters received regarding taxes and debt.
I was lucky that I really did not owe VA $14,000. However, if I did, I would have immediately worked out a payment plan. Some states just want to collect some money, and they know that not everyone who owes can pay in a lump sum. The key is to negotiate and be honest about what you can pay. You really do not need to hire agencies to help you with certain tax issues. I know a few people who have negotiated paying twenty percent of what they actually owed just by having their own discussions with the tax department.
When you prepare your taxes each year, if it turns out you owe taxes and you do not have the money to pay them, file anyway! The fees and penalties are much higher when you fail to file your taxes and choose not to pay them by April 15th. Save yourself a few headaches, figure out what you owe, ask for a payment plan with the IRS or state government, and pay off your debt!
Next, do all you can to pay off your balance faster. Figure out a side hustle and make more money, so you can aggressively attack your debt with extra payments. Also, cut your discretionary spending, to save even more. You do not want to owe taxes for too long, and should try to pay off your balance before you file taxes again (if possible). While you are repaying taxes, the balance continues to accrue interest so it’s best to pay that principal and interest off as soon as you can.