IRS notices, audits, and penalties are all troubling circumstances and significant tax problems. They are significantly more stressful when ignored. As the year comes to a close, take these three steps to make sure you don't carry any problems over into the coming year.
Tax problems are pretty common
- If you are having a difficulty, you are not alone. Each year, the IRS causes issues for thousands of individuals. The most frequent problems are as follows:
- Penalties: Every year, the IRS imposes about 40 million penalties.
- Audits: Each year, the IRS conducts over 1.4 million audits, some of which go on for far over a year.
- CP2000 notifications, also known as notices of underreporting, are sent out by the IRS to 4 million taxpayers each year. IRS computers automatically transmit tax forms when the income recorded on them does not match the data received from employers and other payers. A message that asks for an explanation and advises additional taxes is sent in response to the discrepancy.
Over 17 million people owe the IRS money but are unable to pay it.
Due to tax identity theft, millions of taxpayers' personal information have been stolen in recent years. The likelihood that a fraudulent return will be submitted in these taxpayers' names the next year is increased.
Over 7 million taxpayers fail to complete their required returns each year, according to the IRS.
True, it can take months to resolve IRS problems. This shouldn't stop you from taking action to deal with any tax issues for the next year, either.
What you should do is:
- Fully understand what happened, and why. You must identify the root of your IRS issue before you can address it. An apparent underreporting issue, for instance, can actually be the product of identity theft. Knowing what led to your tax issue will help you prevent it in the future. Discover where to check for details about your IRS account.
- Pick the best option or options to fix it. Finding all of your possible solutions to your problem and selecting the best one may take some time. You must look at the five options to get fines lowered and decide which ones apply to you if you, for instance, have an IRS penalty.
- Don’t wait. Get started now. Once you've chosen a course of action, be sure to send the IRS a comprehensive request or response. The IRS will then be able to decide based on all of your information thanks to this. Additionally, it will avoid misunderstandings, which can lead to a protracted interaction with the IRS. To prevent a premature IRS ruling on your case, it's imperative to meet IRS deadlines. The fact that the deadline has already passed shouldn't deter you from trying to solve your issue.
What does this process look like in practice? Here’s an example.
John got a notification. It claims he failed to record income from a Form 1099 he received from his side business, for which he is now responsible for $2,788 in taxes and a $325 failure to pay penalty. Regarding the notice, John didn't reply to the IRS. He subsequently received a second notification informing him that the taxes and penalties have already been assessed (or "charged") to his account.
John must first comprehend the situation and decide whether the IRS is accurate. He must then comprehend how to fix it. John seeks assistance from a tax expert since some of the phrasing, such as "petitioning the Tax Court," is unclear to him.
To John, a message was delivered. The letter states that he failed to record income on a Form 1099 he received from his side business, and as a result, owes $2,788 in taxes and a $325 failure to pay penalty. John issued a warning to the IRS, but he made no response. His account had been charged (or "assessed") with the taxes and penalties, according to a second letter he received.
After reviewing the documentation, John's tax counsellor concludes that the IRS is accurate. In addition to helping John declare the increased income, John's tax advisor also helps him declare business expenses that lower his overall tax burden. John's tax advisor will research options including first-time penalty abatement in the penalty case. Finally, John won't need to call the IRS because his tax advisor will handle the answer and follow-up.
The lesson of the story is that if you're receiving IRS notifications or have any outstanding tax issues, address them now to prevent any potential ramifications next year, which could include the IRS removing a portion or all of your return.