Each year, there are about 20 million taxpayers who have an issue with their taxes. If you are facing a tax problem, you may find it daunting to put the problem behind you. Some IRS issues are easy to address and others get so complicated that it may be smarter to hire a professional to sort out the details and work directly with the IRS.
Everyone wants to get the best outcome when they have a tax problem. Follow this approach to make sure you put the tax problem behind you forever.
Step 1: Get to the heart of the problem – understand what your issue is.
Start by reviewing your IRS letter. Most IRS tax problems fall into one of four categories:
1. The IRS is questioning the accuracy of your tax return.
This is commonly known as the “audit.” The IRS can audit by mail or in person, but the IRS does not even need to audit to question the accuracy of tax returns.
More common is the underreporter notice (IRS letter CP2000), which compares the information that was reported to the IRS to the tax return you filed and proposes a change. The IRS conducted 3.3 million underreporter investigations in 2017 – far more than the number of audits.
Audits and underreporting issues can often lead to other problems like penalties and a balance that you cannot pay.
2. You cannot pay the IRS the amount you owe.
There are over 16 million individual taxpayers who have this problem with the IRS. The solution is to get into an agreement with the IRS, such as a payment plan, an extension to pay, or hardship relief if you qualify.
3. You haven’t filed a required tax return.
The IRS knows of at least 7.5 million people who do not file a required tax return. Nonfilers may receive notices from the IRS asking for a return. Ultimately, the IRS can file a return for you (called a substitute for return) that can result in a balance owed, penalties, and IRS collection tactics.
4. You have IRS account issues.
This mostly involves some discrepancy between your tax return and/or payments and what the IRS has in its records. This could also include tax identity theft. The IRS sends many notices each year asking taxpayers for more information to help them process their tax return. If you do not reply, the IRS will adjust your return based on what they believe to be accurate.
Step 2: Work with the IRS to resolve the tax problem
Start by understanding the best option and the steps it takes to resolve the problem. Each issue can have a different process to resolve it.
For example, in a mail audit, the only option is responding to the IRS. But what if you do not have the information to support the items questioned by the IRS? You may have to reconstruct your records or provide a valid explanation of a deduction instead of the original receipts to support the expense. If the IRS disagrees, you may have to appeal the decision. You may also have to argue against penalties during the audit by providing facts on how you made your best effort to comply.
If you cannot pay, you will need to find out if a payment plan or another IRS option works for you. Each option comes with different requirements and consequences. For example, if you are going to take more than 6 years to pay on a payment plan, be prepared for a Federal tax lien to be filed under your name. Learn more about your options when you can’t pay your tax bill.
If you have multiple tax issues, you will have to coordinate solutions. This situation often comes up when people owe the IRS and have unfiled returns. Taxpayers who owe back taxes and have unfiled returns usually have to ask the IRS for an extension of time to pay while they complete and file back returns.
If you have nonfiling or underpayment tax problems, you’ll want to consider penalties. The key is to ask for penalty abatement when appropriate. Penalty abatement can be a confusing process and take months to complete, even longer if you need to appeal.
Step 3: Get in good standing – and stay there
Make sure that you don’t have a tax problem in the future. After you have confirmed that your problem is behind you, take the necessary preventative steps to make sure that the problem does not return.
For nonfiling and underreporting, this may mean that you look for a new way to prepare your tax returns. If you file yourself, look into hiring a tax pro to keep you on track and file an accurate return.
For underpayment issues, you may need to increase the withholding on your paycheck or make or increase estimated tax payments.
Also, it is important that you keep up with your IRS account. How do you do this? Order your IRS transcripts. Your account transcript will show much of the activity on your account, including compliance activity that needs to be addressed.
A tax pro can help
Filing taxes is difficult. Dealing with tax problems can be very difficult. Tax professionals can help in all three steps of solving a tax problem. Experienced tax pros are experts in working through the IRS maze to root out all issues. In fact, tax pros have a special access number that they can use to get your account information and understand your situation at the IRS.
Experienced tax pros know your options and the sequence of actions needed to fully address your situation, especially if you have multiple issues. They can help you stay in compliance and prevent future problems with annual tax preparation services and a review of your IRS account to make sure you are in good standing – and stay there.