Paying taxes is a civic responsibility that every working American is subjected to. However, millions of Americans find themselves in hot water with the IRS. Some intentional and others are inadvertent, but understanding the common ways people get into tax troubles can help in avoiding these pitfalls.
Here are 10 common ways taxpayers run into IRS trouble. If you find yourself owing $10,000 or more to the IRS or state, reach out to our tax resolution firm for a free consultation.
1. Failing to File Returns
Perhaps the most direct way to invite IRS scrutiny is simply not filing a tax return. Some people, especially those anticipating a tax bill, might decide to avoid filing. This can result in failure-to-file penalties, which can add up quickly. The IRS will not let this go unnoticed. It’s also important to note that you can go to prison for a year and be fined $10,000 for each legally required tax return that isn’t filed.
2. Incorrectly Reporting Income
Intentional or unintentional underreporting of income is a red flag. Discrepancies between the income reported to the IRS by employers (via W-2s or 1099s) and what’s declared on individual or business returns can trigger audits.
3. Claiming Excessive Deductions
While tax deductions can significantly reduce tax liability, overstepping by claiming excessive or unwarranted deductions can be problematic. This includes inflating charitable donations or exaggerating business expenses.
4. Ignoring IRS Notices
The IRS often sends notices for minor discrepancies or requests for additional documentation. Ignoring these can escalate the issue, leading to more severe consequences.
5. Engaging in Tax Evasion Schemes
Illegal schemes, such as hiding money in offshore accounts or engaging in identity theft and fraudulent returns, are serious offenses that can lead to criminal charges. It’s not a crime for taxpayers to use the tax code to legally find ways to pay less taxes. However, some people get a little too creative or they get the wrong advice. Consult with a tax professional before engaging in schemes to lower your taxes.
6. Misclassifying Workers
Business owners might be tempted to classify workers as independent contractors rather than employees to save on taxes. However, if the IRS determines this is a misclassification, it can lead to back taxes and penalties.
7. Not Making Estimated Tax Payments
Self-employed individuals and some other taxpayers often need to make quarterly estimated tax payments. Failure to make these payments or underestimating the amount can result in penalties and often a surprise tax bill.
8. Not Reporting Foreign Income
U.S. citizens and resident aliens are typically required to report worldwide income, including from foreign trusts and bank accounts. Overlooking or intentionally omitting this can lead to substantial penalties.
9. Engaging in High-Transaction or Cash Businesses
Those engaged in businesses that deal primarily in cash transactions (like restaurants, construction, or salons) are often under the IRS radar for underreporting income. Keep good records in case of an audit.
10. Ignoring State Tax Obligations
While much focus is on federal taxes, individuals also have state tax obligations. Neglecting to file state returns or not paying state taxes can lead to trouble at the state level.
What happens if you land in tax trouble?
IRS problemss, once initiated, can escalate quickly, leading to hefty fines, penalties, or even legal actions. Being aware of these common pitfalls and ensuring compliance can help individuals maintain a clear record and avoid unnecessary complications with tax authorities. When in doubt, it’s always advisable to seek advice from tax professionals or experts in the field.
If you’re facing IRS problems and owe $10,000 or more in back taxes or are being audited, reach out to our tax resolution firm, and we’ll schedule a free and confidential consultation to explain your options thoroughly and help you permanently resolve your tax problem.