Responding to a tax notice is a decision that shouldn’t be made lightly. Why? Tax liens can have an effect on a taxpayer’s future, affecting credit, homes sales and overall finances. Dionne Warwick said that a million-dollar tax lien was a prominent factor in her recent decision to file for bankruptcy protection.

According to a representative for the iconic singer, she wasn’t aware of the taxes that went unpaid by a business manager she later found out had mismanaged the funds. It wasn’t the tax debt that led to her financial problems; in fact, she has already paid over the amount that the Internal Revenue Service said that she owed in actual taxes. It was the penalties and interest that had built up over the 15 years since the debt accrued.

The IRS notice stated that the tax debt accrued 15 years ago, but it wasn’t until 2009 that she learned of the errors committed by her business manager. The debt was originally claimed to be $2.2 million, but that amount was reduced to $1 million by the IRS. The singer has paid $1.3 million to the government agency already, but those funds have not reduced the debt to a controllable amount. The reason is that the payments were applied to the penalties, but the actual principle amount has not been reduced, and thus interest has continued to accrue on the unpaid taxes.

The statement released by her representative stated that the two had come to the decision to file for bankruptcy in order to resolve the situation. They hope that the tax debt will be discharged by the bankruptcy court.

Sadly, financial mismanagement can occur and the taxpayer is the one who faces the tax penalty. Those who receive a notice from the IRS should seek the advice of an experienced tax attorney.

Source: Ace Showbiz, “Dionne Warwick Files for Bankruptcy After Hit With Tax Lien,” March 26, 2013