When it comes to IRS tax problems, there are plenty. Some may be simple and easy to resolve, while others could land you in jail.
But no worries, we got you covered! While you shouldn’t let the IRS intimidate you into believing that they will haul you off to jail for the slightest mistake, you shouldn’t feel you can bully them into getting your way either. In this article, we’ll talk about some of the common IRS Tax problems and how you can solve them.
First, an important disclaimer
And this is not one of those disclaimers you want to ignore. If you only owe a small debt to the IRS and you are entirely sure you haven’t made any “mistakes” the IRS could view as tax evasion, by all means, deal directly with the IRS. This guide will provide you with the tools you need.
However, if you owe $5,000 or more or there are aspects of your financial past you would prefer the IRS didn’t dig too deep into, you need a tax attorney. Tax attorneys are expensive but not nearly as expensive as not having one during an IRS tax audit that goes wrong. If pricey retainer fees and $200 an hour rates are not in your budget right now, consider hiring a tax relief firm that has tax attorneys on its staff.
IRS Tax Problem #1: Filing Late
One of the best pieces of advice you can receive is always to file your tax returns on time, even if you can’t pay. But why file if you can’t afford to pay? There are two good reasons to file your tax returns on time even if you don’t have the cash to pay them straight away.
First, it’s not a crime to owe the IRS. It is a crime not to file. Al Capone was famously convicted by the IRS because he didn’t file tax returns on his illegal activities. He would never had seen the interior decoration of Alcatraz if he had just filed his 1099’s like everyone else.
The key law to consider when trying to understand tax evasion is 26. U.S. Code 7201 – Attempt to evade or defeat tax. The IRS doesn’t consider you are attempting to evade or defeat tax if you don’t have the assets to pay. It may collect everything it can and put a lien on your current and future assets, but as long as you file your taxes accurately and on time, you will not be charged with tax fraud.
Second, filing your tax return helps you to avoid one of the biggest tax problems that Americans encounter: a failure to file penalty. Filing late costs more than paying late. As of 2016, the IRS charges a 5% penalty of the unpaid taxes for every month you are late. The penalty for paying late, on the other hand, is 0.5% a month. In other words, it costs 10 times more in penalty fees to file late than to pay late. Enough said.
IRS Tax Problem #2: Return Errors
It should seem obvious; however, the biggest tax problem that most people face is making errors on their tax return. When you make errors, it raises a red flag for the IRS.
Their suggestion? Double-check your work. To help you, the IRS offers this Checklist of Common Errors When Preparing Your Tax Return. It includes some of the most common tax return errors such as an incorrect or missing social security number and incorrect tax calculations.
Tax return preparation is so overwhelming, about 60% of taxpayers now pay Tax preparers to do the work for them, according to a U.S. Taxpayer Advocate report. So next time you file your taxes, consider getting professional assistance. Check out our list of best Tax attorneys sorted by user reviews.
Tax Problem #3: IRS Tax Audit
Are your knees knocking and your palms sweaty over the thought of going through an IRS tax audit? You’re not alone in your distress. However, if you’ve done nothing wrong, you should have no problem with an audit.
The typical tax issues that arise during an IRS audit include:
- Missing receipts
- Unreported income
- Disallowed business expenses
- Erroneous audit results
- Misunderstanding your appeal rights
Before you panic about going through an IRS tax audit, know your obligations and your rights. While it is your responsibility to demonstrate that you filed your taxes accurately, you have a right to:
- Professional and courteous treatment by IRS employees.
- Privacy and confidentiality about tax matters.
- An explanation as to why the IRS is asking for information; how the IRS will use it; and what will happen if the requested information is not provided.
- Payment of only the correct amount of tax.
- Help with unresolved tax matters.
- Representation, by yourself or an authorized representative.
- Appeal disagreements, both within the IRS and before the courts.
Additionally, if you need assistance with issues related to an audit or any other tax problem, you might want to seek the assistance of the Taxpayer Advocate. The TA acts as a liaison between the IRS and you by helping you resolve disputes over improper audits as well as repayment issues, penalty assessments, and more. Check out our list of Tax Attorneys who can help you.
Tax Problem #4: IRS Errors
Contrary to popular belief, the IRS is just a federal agency made up of human beings like you. And just like you, they are prone to making errors. What kinds of errors might they make and what can you do about it?
- Lost tax returns
- Misapplied payments
- Penalties assessed without merit
- Incorrect notices of late filings and underpaid taxes
- Not releasing tax liens in a timely fashion
- Data processing errors
- Unclear written communication
The first rule in replying to an IRS notice is NOT to assume that they are correct. Be sure to keep copies of everything and when possible, file your tax return electronically and correspond in writing.
Just be patient. According to experts, the IRS is late in responding to written letters about 40% of the time, and only about 75% of phone calls are answered. Another option is to make use of your right to representation before the IRS and hire a tax relief firm.
Tax Problem #5: Tax Collection
If you do not pay what you owe when you file your tax return, you will soon receive written notice. It is your opportunity to bring your account up to date, or the IRS may pursue other options such as:
- Filing a Notice of Federal Tax Lien against real or personal property
- Serving a Notice of Levy against wages, bank accounts, and Social Security (Find out what an IRS Tax levy is)
- Offsetting a refund to which you are entitled
Related: Learn about IRS’s collection procedures here.
Don’t let tax problems escalate. Whether you miss a payment or a filing deadline, claim a deduction improperly, or have incomplete records, understanding how the tax system works is beneficial. And most importantly, don’t panic. Professional Tax relief companies like these can help you resolve tax problems with the IRS. Also, understand that there are Tax relief options to relieve your burden. Find help before it is too late. (See how Tax attorneys can help you with filing back taxes).
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Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.