Don’t Underestimate the IRS’ Power to Wreck Havoc on Your Life + Your Wallet
You decided your taxes were easy enough that you could handle them on your own. Heck, you really didn’t want to pay a tax professional hundreds of dollars. After all, they only type numbers into a computer program and have it spit out the appropriate forms. Easy peasy. Right?
All is good until you receive a letter in your mailbox from the IRS. Holy cannoli! Ish just got real.
Your mind mulls over every entry. But it’s a little foggy seeing as though it took them two years to say anything to you. How the heck are you supposed to remember what happened?
One small mix-up — or was it a major faux pas — on your tax return and now you owe thousands after they tack on their astronomical penalties and interest.
To make matters worse, in recent years the IRS has increased its filing of levies (they will seize property or income), liens (they will place their mark on your assets like a house), and wage garnishments. In fact, in 2010 alone, over 3 million levies were filed. Even more recently, the IRS found the cash to hire 700 more enforcement workers. That means more audits, more field collections, more levies, more liens, more, more, and more.
That means less room for error for you, especially if you own a small business or are a solopreneur.One small mix-up -- or was it a major faux pas -- on your tax return and now you owe thousands after they tack on their astronomical penalties and interest.Click To Tweet
Top 4 Ways to Get in Tax Trouble
Don’t fret. I’ve listed the top 4 common ways people get in trouble with the IRS, hopefully, you don’t fit any of them:
- Not filing the correct number of exemptions – An exemption (credit for each person listed on the return that is your dependent) gives you a major tax deduction, and some taxpayers can’t resist the temptation to file more than they should. You can only claim exemptions for yourself, a spouse, and for all “dependents.” Dependents have to meet specific criteria so make sure you follow the IRS guidelines so that you don’t mistakenly file an extra exemption. Be on the look-out for the next post to help you determine who satisfies the IRS’ criteria for dependents.
- Not reporting early withdrawal of retirement monies – If you withdraw money from your retirement account (such as a 401(k) or IRA) before you’re 59 1/2, you may face a 10 percent federal penalty on your withdrawal. It doesn’t stop there. You might also owe a state penalty and an income tax on the money withdrawn.
- Not paying enough taxes when self-employed – Let’s face it. It’s rare that a small business owner or solopreneur knows how much to pay in taxes or when to send in those quarterly payments. The result; a penalty which could have been avoided. Don’t feel bad if this is you. The tax code is 40,000+ pages of complex legal mumbo jumbo that the lay person doesn’t want to tackle.
- Not reporting gambling winnings – Yep, that money you won from the scratch-off is taxable as income. You have to include it on your return. You must report all gambling winnings, including winnings from lotteries, casinos and horse races, as income.
The first thing you must always do is respond to the notice. The worst thing you can do is ignore the IRS. They don’t go away… ever. A simple phone call with a 1-3 hour hold is all it takes to get a live person on the line to help you sort through your situation. Remember they are people too. No different than you or me.
If you agree you owe the money, work with the rep to set up a payment plan. That will avoid any further harassment.
If you don’t agree or understand the notice, it’s best to consult the expertise of a tax pro CPA, tax attorney, or EA (Enrolled Agent). They will be able to walk you through the notice and help you determine the best course of action.
That simple DIY software caused a minor error and now instead of paying a tax pro hundreds of dollars now you are paying the IRS thousands of dollars. I don’t like that math.The worst thing you can do is ignore the IRS. They don't go away... ever. Click To Tweet
Have you had any run-ins with the IRS lately? Let me know what your experience was like in the comments.
In the meantime, keep it simple…
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