It Could Happen to You: Man Wrongfully Hit With $111K Tax Bill

Photo: CorbisReceiving a letter from a law firm rarely signals good news, but Tulsa, Oklahoma, resident Mike Knight's world was turned upsidedown when he opened a letter wrongly stating that he owed $111,000 in back taxes.
"I was pretty shocked when I saw that amount," Knight tells Yahoo Shine. "I even thought it might be a scam because I’ve always paid my taxes."
The letter, sent in June, was from law firm Linebarger Goggan Blair and Sampson, which represents the Oklahoma Tax Commission (OTC). The firm claimed that Knight owed the large amount of back taxes on three restaurants he owned. The problem? “I dissolved those businesses in 2005," says Knight. The other problem? Figuring out how to prove he was all paid up.
Knight says that somewhere along the line he simply tossed the records that could prove he had paid the taxes back when his restaurants were still operating. His bank no longer had the records, either, because it purges information after seven years. “I called the OTC and they said they had changed computer systems and didn’t have access to files proving that I had paid,” he says. "Then, they sent me a second letter stating that I owed them an extra $1,000 in penalty fees, interest, sales tax, and attorney fees which totaled $112,000 more than what I originally owed,” according to Knight.
More on Yahoo Shine: The Price Is Right ... and the Taxes Are High
The OTC also stated that if Knight paid $56,000 on the spot, he could avoid further penalty fees. “I was angry because this was their mistake, all because of a computer error,” he says. By a stroke of luck, his accountant was able to track down proof of payment in a storage unit that was on the verge of being destroyed. “But the storage unit only contained half of my records so the OTC tracked down the other half in their old system,” says Knight.
In September, Knight received a letter from the OTC confirming that his debt was paid. The letter in part read, "The tax payer account has been corrected to reflect no outstanding liability. Please accept our apology for any inconvenience this has caused." But his battle isn’t over yet — he’s paid $865 in lawyer fees, which he wants the OTC to refund, but he's been unsuccessful in his attempts to collect. “A mistake like this can happen to anyone,” says Knight. “This experience makes me very afraid to throw out anything.”
That’s a legitimate fear, according to Lauren Lyons Cole, a New York-based certified financial planner, who advises her clients to save all of their tax records, even beyond the seven-year period, the general rule of thumb for hanging on to financial records.

More on Yahoo: 8 Tax Breaks That Cost Uncle Sam Big Money
"People should take control of their own finances," Lyons Cole tells Yahoo Shine. "As much as computers can be a convenient way to store files, they can also backfire. Keeping paper records is smart, in the event of an emergency like this."
Lyons Cole suggests using an external hard drive rather than keeping financial records in an email account. (If your records contain your Social Security number and someone hacks into your email, you could be at risk for identity theft.) What's more, banks may charge you a fee for the inconvenience of having to dig into your old files.
"It may also be worth it to have an accountant do your taxes each year," says Lyons Cole. "That way, you have even more backup, if you need it." And finally, at the end of each month, download your bank statements — each and every one — so you have proof of every transaction. It might seem like a hassle now, but you might be thanking yourself later.
More on Yahoo Shine:
Simple Mind Tricks for Deprivation-Free Budgeting
Suze Orman's Best Advice for Getting Out of Debt
11 Smart Santa Saving Tricks for a Debt-Free January