When it comes to managing your taxes, it's perfectly normal to experience stress and uncertainty. Filing annual tax returns might bring relief to many, but for tens of millions of taxpayers, it's the beginning of a recurring cycle of tax-related stress. We're here to help you navigate through the most common tax problems that Americans face each year, equipping you with valuable tax tips to tackle these issues effectively.
Butler Squared Consulting has compiled the top tax problems that taxpayers grapple with, utilizing the latest IRS data to shed light on these challenges. From tax penalties and unpaid taxes to math errors, non-filers, tax-related identity theft, underreported income, and tax audits, we've got you covered. Here's a closer look at these issues and how to address them.
Top Common Tax Problems Taxpayers Face Today
1. Tax Penalties
Non-compliance with the tax code often results in IRS penalties. These penalties encompass various violations related to filing, reporting, or payment requirements outlined by the IRS. While civil penalties are more common, in exceptional cases, criminal prosecution may occur. In 2021, the IRS imposed nearly 41 million civil penalties totaling $37 billion, with the majority originating from individual and estate and trust tax returns. The two most common penalties for individuals and estates were for failing to pay (51%) and estimated tax penalties for self-employed individuals (33%).
How to Fix It:
Upon receiving an IRS tax penalty notice, it's crucial to follow the instructions provided. Carefully review the notice to ensure its accuracy and respond by the specified deadline. For example, if you've incurred a penalty for not paying taxes, you can either pay the owed amount or request a penalty waiver, ensuring you gather the required documentation to support your claim.
2. Unpaid Taxes
In the previous year, around 17 million taxpayers filed their returns but failed to pay their additional taxes by the deadline. Unpaid taxes incur a 0.5% monthly penalty on the outstanding amount and accumulate interest over time. Currently, the IRS is pursuing $133 million in unpaid taxes, penalties, and interest from over 10 million delinquent accounts. To address this issue, consider the following solutions.
How to Fix It:
The most effective approach to resolve unpaid taxes is to promptly pay the full amount to the IRS. This reduces the cumulative penalties and interest in the long run. If immediate payment is not feasible, explore alternative options such as setting up a long-term payment plan, negotiating an offer of compromise, or requesting a temporary delay in collections if your financial situation is expected to improve.
3. Math Error Notices
Dealing with numbers is a significant source of stress when it comes to taxes. The IRS sent math error notices to over 12 million taxpayers in the previous year due to mistakes like computational errors, incorrect values, missing entries, and failure to meet eligibility requirements. When it comes to math errors, the IRS has the authority to correct your mistakes without requiring your intervention. Here's what you need to do if you receive a math error notice.
How to Fix It:
Upon receiving a math error notice, carefully review its contents. Depending on the specific notice you receive, you may either owe taxes or have your refund adjusted, or your tax balance may be zero (i.e., neither owed nor refunded). Respond to the notice within 60 days of receiving it. If taxes are owed, pay them by the specified deadline. Even if you don't owe anything, respond to the notice while ensuring that you provide the required information. In such cases, no payment is necessary.
Each year, millions of individuals and businesses fail to file their mandatory tax returns by the deadline. The IRS relies on third-party information returns (e.g., W-2s or 1099s) to identify non-filers, generate substitute tax returns, and determine the owed taxes, penalties, and interest. Recent data indicates approximately nine million individual non-filers and an alarming 42% increase in business non-filers from the previous year. To avoid escalating tax-related problems, address this issue promptly.
How to Fix It:
If you missed the regular or extended tax deadline, file your taxes as soon as possible. Ensure you pay the owed taxes in full as soon as you can to minimize the penalties and interest that accrue over time. For individuals who haven't filed but don't owe taxes (e.g., expecting a refund), no penalties or interest will be incurred.
5. Tax-Related Identity Theft
Tax-related identity theft occurs when someone steals your personal information, such as your Social Security number, to file a fraudulent tax return and claim a tax refund. Millions of Americans are either suspected or have fallen victim to this type of identity theft each year. In 2021, the IRS issued nearly five million Identity Protection Personal Identification Numbers (IP PIN) to taxpayers affected by identity theft. IP PINs are used to verify your identity with the IRS when filing your return.
How to Fix It:
Even if you've experienced tax-related identity theft, it's crucial to file your taxes on time. Upon receiving a CP01A Notice containing your IP PIN, use it to file your taxes. If you require an IP PIN, obtain one using the IRS's Get an IP PIN tool. Respond promptly to any IRS notices and follow the necessary steps to protect your financial information as an identity theft victim by visiting IdentityTheft.gov.
6. Underreported Income
When an individual's tax return doesn't align with third-party information returns, it constitutes underreported income. Underreported income is the primary contributor to the tax gap, which represents the shortfall between the owed taxes and the voluntarily paid and on-time amount. The tax gap is a substantial loss of revenue, estimated at $600 billion annually. If you receive a Notice of Underreported Income (Notice CP2000), review it carefully and respond accordingly.
How to Fix It:
Carefully examine the Notice of Underreported Income and respond in accordance with the proposed changes. If you agree with the changes, indicate your acceptance in your response and ensure timely payment of the outstanding taxes, penalties, and interest. If you disagree with the notice, still respond promptly, providing an explanation and supporting documents. The IRS will work with you to resolve any discrepancies.
7. Tax Audits
Despite the fear of tax audits, they are relatively infrequent. In 2021, fewer than one percent of taxpayers (approximately 739,000) were audited. Tax audits entail an examination of your tax return to verify the accuracy of the reported information. In the event of an audit, it's crucial to know how to respond.
How to Fix It:
Upon receiving an audit letter from the IRS, carefully review the requested information. Gather the necessary documents and send them to the IRS within the specified timeframe. Ensure timely response and adherence to the provided deadline. Audits can result in three outcomes: no change, an agreed resolution, or a disagreed resolution. Regardless of the outcome, you can always seek guidance from TurboTax Audit Support if you're uncertain about the steps to take.
How to Solve Tax Problems: 4 Essential Tips
When faced with tax problems, it's essential to take a proactive approach to resolve them effectively. Here are four essential tips to guide you:
Get Started As Soon As Possible
Upon receiving an IRS notice or letter, respond promptly within the specified deadline. Timely responses, along with the provision of necessary documentation, prevent potential misunderstandings with the IRS. The IRS will review your response and the supporting evidence, a process that may take several months to conclude. Starting early ensures a quicker resolution.
Understand the Problem
Comprehending the issue is fundamental to its resolution. Carefully read the letter to identify the tax problem and the steps required to address it. Even if you disagree with the notice, follow the provided instructions for a response and provide evidence and records to support your case.
Find the Best Solution for Your Situation
Conduct research to understand the available solutions. Many tax problems, including tax audits and underreported income, can be appealed. You can also explore options to waive penalties and arrange suitable payment plans based on your financial situation.
Talk to A Butler Squared Consulting Expert
Consider consulting a Butler Squared Consulting Live Full Service expert who can assist in preparing, signing, and filing your taxes with confidence. Butler Squared Consulting Live Full Service is available in both English and Spanish, providing you with the assurance that your taxes are being handled correctly.
Navigating tax problems may seem daunting, but remember that these issues are more common than you might think. Following these tips will help you resolve your tax-related challenges effectively and with confidence.