Feb 16, 2024
There's a reason for all those taxman jokes.
Nearly 1 in 4 (23%) Americans owe back taxes, according to a survey from GOBankingRates. Among them is Adrianah Lee, a 22-year-old "e-girl" with a large following who admitted to YouTuber Caleb Hammer that she owes back taxes for two years.
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"I know it’s bad, but in my defense," Lee said, pausing to think before continuing. "There is no defense, but everyone around me is like, 'It's okay, I don't pay taxes either.'"
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Hammer, who appeared flabbergasted by this, took a close look at Lee's financial situation and offered her some harsh advice during the episode of "Financial Audit." He said she has the potential to become a millionaire someday, but she’s more likely to die in poverty if she doesn't make changes.
Last year, the IRS revealed that the "tax gap" — which is the difference between the estimated amount Americans owe and the amount of tax that is paid on time — was $688 billion in the 2021 tax year. The agency says this figure includes nonfiling, underreporting and underpayment of taxes.
The GOBankingRates survey respondents who said they owe back taxes had different plans, including setting up a payment plan with the IRS, using their savings or emergency funds to pay it back all at once, and borrowing money from a bank or family and friends. Some hadn't decided what they were going to do yet, and less than 1% of all survey respondents said they had simply given up on ever being able to pay.
Kicking the can down the road
Lee earns a living as an online content creator. She’s managed to amass a sizable audience through streaming platforms such as Twitch, TikTok, Instagram Reels and YouTube. Income from all these sources combined is between $4,000 and $6,000 a month, based on her estimates.
Her income isn’t extraordinary, but the fact that it’s generated entirely from online content creation puts Lee in an exclusive club: 72% of online content creators earn less than $500 over the course of a year, while only two percent made more than $50,000, according to Linktree’s Creator Report 2023.
Despite her precarious income, Lee has locked herself into serious debt. Her monthly interest payments total $983. “[Sometimes] I get a lot of money and I pay off all my [credit] cards,” she says. “Cool, I’m not going to run these up again, and then I do!”
She also owes money to the IRS, but says she prioritized other expenses instead. “Everyone around me [says] it’s okay, I don’t pay taxes either,” she says. “I’m only two years behind, and I’m taking care of it now.”
Hammer believes she’s just delaying the inevitable. “‘I’ll figure [it] out’ is a kick-the-can-down-the-road-forever until we die on a Walmart floor thing,” he says.
The good news is that Lee is still young and has plenty of time to catch up.
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Benefits of compound growth
Hammer believes Lee has “the best decade of compound growth in your life” ahead. Lee could “easily [be] a millionaire, but not the way you’re doing it.”
A person who starts saving and investing $10,000 a year can end up with over $2 million more by the age of 60 if she starts when she’s 20 rather than 30 years old, assuming 10% annual returns.
This is why even legendary investor Warren Buffett attributed his success to getting started early.
Unfortunately, Lee isn’t benefiting from this, because instead of investing she has tax bills and a debt burden to deal with. Her total debt is $46,490.
Hammer recommends she consolidate all her credit cards to manage that debt. He also recommends she get rid of her car (a Land Rover), pay her taxes on time and hire a professional accountant to help her claim tax write-offs on business-related expenses.
She also needs a tight monthly budget and a few months to save up an emergency fund. If done right, that should put her in a position to start investing and compounding her wealth.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
