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Young, broke, and scared of the IRS: the millennial tax trap

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It wasn’t a very nice way to begin a letter, but then, it was from the Internal Revenue Service, and it got Greg’s attention. 

The Athens, Georgia, veteran said the notice, which arrived earlier this year, cited three months of taxes he had failed to pay two years ago — and was the first he’d heard of it.

After leaving the military, Greg (Greg asked that his last name be withheld to protect his financial privacy), then 27, had taken a job in information technology. “I guess when I filled out my taxes for 2013 I messed something up, so I didn’t get my private-sector job included into the taxes owed,” he said. Now he was into the Treasury Department for more than $1,700. 

The IRS doesn’t keep track of how many millennials incur tax debt, but a survey by personal finance adviser NerdWallet found they are more afraid of filing their taxes than any other generation. Eighty percent of millennials, defined by the survey as 18 to 34 years old, fear they will make a mistake, underpaying or overpaying. 

Putting aside outright tax cheats, young workers are financially inexperienced and, increasingly, part of a gig economy — driving for Uber, funding their creative work through Patreon — that requires more care with taxes than some are able, or willing, to take. For example, people who work in contract jobs typically don’t have their taxes withheld automatically and need to set up a program of quarterly estimated tax payments on their own.

Digging their tax trap deeper, fewer than 10 percent of millennials go to the IRS when they have a tax question, and only about a quarter seek help from a tax professional, the survey found, compared with 38 percent of all taxpayers who seek help from a tax pro. Instead, most young people turn to friends and family, a largely unreliable if well-meaning group. Millennial taxpayers in particular bemoan the long wait times on the phone with the IRS and the agency’s weird penchant for mail (like, mail).

“It took at least five hours of your life just getting somebody on the phone,” said Greg, who said he placed four or five calls to the agency seeking to confirm the letter’s validity before signing up for a payment plan on its website. “There needs to be more notification and communication on their part.” 

This month, Greg made his first contribution to an IRS tax debt repayment plan, which he said was easy enough to set up. He’ll be making a $150 payment every month until he has repaid the debt. Starting this tax season, he’s working with a certified public accountant.

“Someone facing a tax bill they can’t pay can usually set up a payment agreement,” IRS spokesman Eric Smith said. Indeed, even if the agency isn’t so hot on the phone, it will send multiple letters urging debtors to set up plans before threatening them, if necessary, with levies and liens. Resources are available on the IRS website, agents regularly describe payment plans to those who get through on the phone, and accountants work with the agency to devise plans for their clients. 

“If you don’t contact us, we can take action to collect the taxes,” Smith said.

That said, millennials are less likely to own homes than generations before them, so the threat of a property lien doesn’t carry the weight it might, and a change of rental address can cut the letters off altogether. Anthony (Anthony is a pseudonym), a 24-year-old based in Washington, D.C., incurred just over $1,000 of tax debt after he tried to claim an education credit on his 2013 taxes that his parents had already claimed. He sent in a correction of the error but then lost his job and couldn’t pay the balance. When he moved in September of 2014, the letters stopped coming.

“It was an out-of-sight, out-of-mind thing,” he said.

In fact, the IRS was nothing compared to the creditors who were after Anthony for his student debt, he said. The following year, what would have been his tax refund was taken to pay off a portion of the outstanding debt. Employed by that time, he was able to pay the balance. 

“I still don’t rank them anywhere near as scary as Sallie Mae,” Anthony said of the IRS. “They were very slow to catch on to it. … With Sallie Mae, they immediately start calling you on the phone — and start calling your parents. Sallie Mae is everything the IRS does, but on ‘roids.”

While credit card companies collecting student debt can affect a debtor’s credit scores immediately, tax debt doesn’t begin to influence them unless levies and liens are issued, and enrolling in a repayment plan won’t affect the scores either. Yet of the seven millennials facing tax debts interviewed for this article, only two were familiar with these plans, and neither of them knew that signing on to one wouldn’t affect their scores. 

“I don’t think anyone should be afraid of the IRS, because as long as you’re talking to them, bad things don’t happen,” said Cari Weston, director of taxation for the American Institute of CPAs. 

Erik Duemig and his brother Joe, who own a production sound company in Austin, Texas, fell into tax debt when they made what Erik described as a series of clerical errors on a 2014 filing. At 26, the twins had filed taxes only a few times before, and were previously filing as contract employees, not business owners. Eventually, they hired a certified public accountant for $1,200, but only after Joe had been audited.

Few of the Duemigs’ millennial friends hold down a traditional job with its W2 tax form, they said, citing a culture that relies heavily on the gig economy. 

“For millennials who are making money on the Internet, like YouTube ad sales and things like Patreon, I imagine that kind of income stream gets really weird to deal with the IRS,” Erik said.

Millennials who find themselves in debt to the agency have more constructive options than neglecting debt letters and less expensive ones than hiring a CPA. Tax tutorials are available online, and the Society of Grownups, a Brookline, Massachusetts, financial literacy group, offers two classes, “Quarterly Schmarterly” and “Get Off Your Tax.” Each costs $30. In one class, a third of those in attendance owed money to the IRS, said Jena Palisoul, director of financial planning.

“Some people get so frightened, they take no action whatsoever,” she said, “and that’s the worst thing to do.”  

Smith of the IRS acknowledged “it can be a while” on the phone but said “it’s better than it was last year, as Congress provided us with some increase in funding for the phone operations. We really encourage people to [seek help] online first.” 

“I think they are trying to speak to everyone in a more technology-friendly way,” said Weston. “They’re tweeting, they’re trying to get representatives out there … but with all this identity theft they are being very cautious about communicating with taxpayers digitally.”

Even so, “it was all very poorly communicated to us by the IRS,” Duemig said. 

He added: “Tax law, it almost feels, like, intentionally complicated. It just tires you out so you just pay more than you need to.”

See also:

Life insurers see enormous opportunity as millennials come of age

How the life insurance industry will change in 2016


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