What I Did When I Owed THOUSANDS in Taxes and Couldn't Pay on Tax Day.
Hard knock lessons and how I got out of a money hole!
Three years ago I remember watching the amount of money I was to owe the IRS growing higher and higher. It wasn't $1,000, it wasn't $2,000, it was $10,000 I didn't have and wouldn’t be able to pay by the deadline.
I wept as the reality of my situation set in. I was unbelievably terrified. I imagined the worst-case scenario: the IRS knocking on my door and taking all the things I loved away. I wiped the tears away and asked myself a few burning questions:
Where did I go wrong with my taxes?
How am I going to get out of this tax mess?
What options do I have if I can’t make my tax payments now?
How can I avoid being surprised by the taxes I will owe in the future?
Let me start off by saying this is my personal financial story. I am a writer and life coach. I am not a financial advisor, tax attorney, lawyer, or CPA. This is for educational purposes only. If you need professional help seek it, it's worth it.
My goal in sharing my story is to provide hope to those facing this same challenge. I'm here to assure you that you are not alone and there is a light at the end of the tunnel. You can recover from any mistake if you are willing to dig deep, glean the lessons from the f*ck ups and proactively take action toward the best possible outcome right now.
Where did I go wrong with my taxes?
There is a saying you don't know what you don't know.
For most of my adult life, I acted like an Ostrich with its head in the sand when it came to taxes.
My mother was a certified CPA who took care of all my bookkeeping, and every April feathers flew over tax preparations. We fought viciously leading up to the Tax deadline. It sucked.
Well, this particular year I decided to dissolve my LLC partnership and become a single-member LLC. I also made the most money I had ever made as a freelance contractor - six figures.
What I didn't know at the time, was that there was a self-employment tax of 15.3%.
I hadn't accounted for it, because guess what I didn’t know about it. I didn’t take the time to educate myself on how self-employed people are taxed differently than employees.
I ALSO did the thing you should NEVER do as a self-employed contractor.
I dipped into my savings account which was designated for tax payments. It was a survival tactic I later regretted.
In total three major mistakes:
I changed my business structure without considering the tax ramifications.
I didn’t know about self-employment tax, because I didn’t educate myself on taxes!
I used savings that were intended for tax payments.
These mistakes compounded into a financial disaster that I would have to overcome.
How am I going to get out of this tax mess?
The first thing I did was pulled my head out of the sand and took 100% financial responsibility for getting myself in this fix. This problem went well beyond what my mother’s professional capacities could solve, plus I needed to take ownership of my business and finances.
Next, I hired a professional CPA that dealt with entrepreneurs like me. (She was referred to me by someone I financially admired) I paid the CPA money to help me untangle the mess of my business structure and asked her lots of questions about where I went wrong. It was embarrassing at first but with each phone call, I gained more confidence.
I also bought every reputable book I could get my hands on about taxes.
These five books I highly recommend:
The Tax and Legal Playbook by Mark Kohler
Profit First by Mike Michalowicz
Tax-Free Wealth by Tom Wheelwright
What Your CPA Isn’t Telling You by Mark Kohler
Rich Dad Poor Day by Robert Kiyosaki
I read them cover to cover. Every night for weeks I was curled up in bed with tax books, my fiance thought I had gone mad.
I was mad, I was mad I got into such a tax disaster and I was determined to learn how to never let this happen again.
I also learned how to use Quickbooks and took a life-changing course on bookkeeping taught by superstar Stevie Jones, who helped me through one of the most financially difficult times of my life. Mastering bookkeeping was painful but necessary. It’s an essential step for any entrepreneur who wants to succeed at running a profitable, efficient business.
For those of you who are employees…keep track of any receipts that may be write-offs! It’s important to have the documentation to back up your tax savings.
Furthermore, I reorganized how I managed my business bank account(s) based on the Profit First model. I created a specific savings account for my tax payments, that was less accessible and hard for me to reach. I also implemented Mike Michalowicz’s percentage process of allocating funds in different bank accounts including profit, taxes, and operating expenses.
If you want to learn more you can get his Profit First book or check out this video:
I also hired a tax attorney to assist with a business entity restructure that would positively impact how I was taxed moving forward AFTER I educated myself on how it worked.
With all these action steps underway, I was shedding shame and feeling financially empowered to face taxes ups and downs head-on. Then I did the last and most crucial step.
I FILED MY TAXES EVEN THOUGH I DIDN’T HAVE THE MONEY TO PAY WHAT I OWED.
Let me repeat. I filed my taxes even though I didn’t have the money to pay what I owed.
Not filing your taxes will make matters worse.
Call the IRS. Ask questions.
Hire a CPA. Hire a Tax Attorney.
Even if you are strapped for cash.
As my CPA mother says “Proscationation doesn’t make it better, it makes it bigger.”
Face the financial fear and take positive, powerful action, no matter how uncomfortable.
You might be wondering, how can I hire a professional when I can’t even pay my taxes?
From personal experience, it’s the best thing I ever did besides self-education. It is worth every dollar. You can call and ask them questions. You know you have a lifeline to the IRS or your State taxation office. They can help you navigate the ever-changing tax laws that can be mindboggling.
Just make sure you hire a reputable professional that has a high standard of ethics, and good morals and will help you LEGALLY save on your taxes. If your gut tells you something is wrong, it probably is. Trust your gut and research your CPA before paying them to help you.
Wondering how to find a good CPA for your taxes, check out this site:
https://nasba.org/features/nasbalaunchescpaverify/
What options do I have if I can’t make my tax payments now?
The IRS and your State Taxation office likely offer short-term and longer-term installment payment plans. That’s what I did! I got on a payment plan and paid the BIG balances over time. There is no shame in that game.
The only thing to note is, you have to make your payments consistently and on time. I recommend automating them. And don’t take advantage of this generous offer of assistance or let it become a recurring thing you do every tax year.
If you cannot afford installment payments, contact the IRS or your State Taxation office directly and make them aware of your situation. You can also learn more here:
https://www.irs.gov/newsroom/what-if-i-cant-pay-my-taxes
How can I avoid being surprised by what taxes I will owe in the future?
Top of the list. Self-education!
Taxes are a part of our everyday life, it’s worth taking the time to learn about them so you can leverage your unique situation to your financial advantage in a clean, legal way that makes you feel good and keeps the money flowing in your direction.
“Taxes will either make you rich or make you poor. The tax laws of all countries are written to encourage certain activities that benefit the economy and promote social policy. It's our job to understand and take advantage of the tax laws as they are written.” ― Tom Wheelwright
Next, is hiring professionals! I now have a CPA firm on speed dial. They not only manage my bookkeeping but we meet quarterly to review my financial statements and discuss tax projections and savings strategies. I also have access to a Tax Attorney and Financial Advisor.
Today, I am proud to say that the 2022 tax year is the first year I knew exactly where I stood when it came to taxes - months before the April deadline! I had planned, prepared, strategized, and work my a** off to get my tax “house” in order over the last couple of years.
The BIGGEST LESSON I learned, tax planning doesn’t happen on April 15th, it’s ALL YEAR ROUND. And don’t let your mistakes define you, let them teach you.
“Action is hope” - Ray Bradbury.
If this story helped you or inspired you please subscribe, comment below or share with others.
Xo Whitney Anne Ellis
P.S. I am a Life Coach who helps people with their money problems by providing accountability, and one-on-one support without the B.S.
We get to the heart of your money issues. So you can start healing and living out your dreams without financial worry for the rest of your life.
Today, I am personally inviting you to join The Money Reset.
A 90-day program that will take you from feeling broke and broken to becoming financially confident in 90 days or less.
You’ll not only learn how to manage money anxiety, but you’ll begin to create positive lasting change that you never thought was possible.
Are You Finally Ready to Rewrite Your Money Story?
//CONNECT//
Website: https://whitneyanneellis.com/
IG: https://www.instagram.com/whitneyanneellis/
YouTube: https://www.youtube.com/@whitneyanneellis
//DISCLAIMER: All content has been prepared for informational and educational purposes only, and is not intended as Financial, Legal, or Tax Advice. Seek a professional, if you need it.
Copyright Whitney Anne Ellis