IRS Problems & Resolutions
Unfortunately, there are a myriad possible problems you might have with the IRS. Six of the most common are: failure to file or pay on time, failure to file when you owe no taxes, making a mistake on your tax return, inability to pay your tax debt, being investigated for possible tax evasion and conflicts on tax returns in claiming dependants. Also learn what approach you should use in rectifying them. In many cases, the IRS can be more accommodating than you might think, and you don't necessarily need an expensive tax lawyer.
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Filing a Late Tax Return or Paying Late
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The IRS has two sets of penalties: one for filing late, and one for paying late (regardless of when you file). You will not be subject to both at the same time--only the larger of the two applies. The maximum penalty, applicable after 60 days of delinquency, is $100 or 100 percent of your overdue tax bill, whichever is less. This means that if you owe nothing to the IRS, you will not be subject to a penalty no matter how late you file your return. Of course, you can avoid late payment by simply requesting an automatic six-month extension from the IRS. It will be granted as long as the request is postmarked April 15 or earlier.
Failure to File a Return When You Don't Owe Taxes
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Because IRS late filing and payment penalties are based on a percentage of the amount due, you won't be assessed a tax penalty if you fail to file when your tax liability is zero, even if you are required to file a return. Believe it or not, there is no way for the IRS to enforce its requirement that you file a return in those cases when you are required to file even though you don't owe taxes. Be careful, though--if you are relying on a tax exemption to bring your tax liability to zero, keep in mind that some exemptions may not be allowed unless they are claimed, and you can't claim them without filing a return.
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Amending Your Tax Return
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The IRS has a special form, Form 1040X, for amending your tax return. If you discover an error on your tax return, it is a good idea to rectify it as soon as possible, even if the error was in your favor and even if you can't pay the tax right away. Obviously, if the error were to your detriment, it would be advisable to amend your tax return and seek a refund. Form 1040X is simple to fill out--it only asks for your original information, your new information and an explanation for any changes.
Inability to Pay
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The IRS has two ways of compromising with taxpayers whose tax burdens are beyond their ability to pay. The first is an installment payment agreement. If you manage to convince the IRS that even installment payments are too much for you to bear, then the IRS will consider an Offer in Compromise, which will allow you to pay less than the total amount due.
Avoidance vs. Tax Evasion
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Tax avoidance is the use of legal means to avoid taxes. Tax evasion, a federal crime, is the use of illegal means to avoid taxes. The IRS will generally not prosecute for tax evasion in the case of a simple miscalculation, although financial penalties will apply. Negligence in calculating your taxes is a legal gray area, but is usually treated as a civil offense rather than criminal tax evasion. There are two types of tax evasion: 1) Misreporting your tax liability. 2) Fraudulent transfer of assets--to an overseas bank account, for example--to avoid the payment of taxes already assessed. Both can lead to prison time. The best preventative measure is to simply avoid any form of dishonesty in calculating your taxes or disposing of your assets.
Claiming Dependants
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You could end up with an unexpected tax bill if, for example, your college-aged daughter claims herself as a dependent on her own tax return and you claim her as a dependant on yours. The best way to handle this situation is to file Form 1040X yourself or have the other claimant do so.
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