Here’s where the faulty thinking comes in. People tell me they change their withholding so they can pay their bills. Well, if you are changing your withholding so you break even and don’t get a refund at the end of the year, then fine, I’m with you. But if you change it so that you owe taxes at the end of the year, you haven’t paid your bills, you’ve just traded one bill for another. And the one you’ve traded for is the Big Kahuna, the 600 pound gorilla, the creditor who can garnish your wages, attach your bank accounts, and reach assets no other creditor can reach. They have more power and more tools than virtually any other creditor. So that’s who you’re going to choose to owe?
Moreover, the IRS has tools to stop your under-withholding, but they don’t just make you stop. They punish you. If you can’t pay the taxes you owe because you are under-withholding, the IRS may instruct your employer to withhold as if you have zero deductions-withhold the maximum-and they won’t let you change it back. This is called a “lock-in letter.” Then, of course, in every subsequent year that you are entitled to a refund, the IRS will keep your refund to pay the back taxes. And this could be in addition to, not just instead of, a wage garnishment or other collection activity. So, if you were having trouble paying the bills before, imagine how hard it will be when about a third of your paycheck is going to the IRS.
Michael A. Cibik is a partner at the Philadelphia law firm of Cibik & Cataldo, P.C. He is one of the few attorneys in the Philadelphia area certified by the American Bankruptcy Board.
If you or someone you know is having financial problems, stop worrying and call Michael at (215) 735-1060 for a free consultation.
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