Tax problems must be addressed because they pose a significant financial risk, both personally and within a business’s scope. Tax issues usually relate to far greater dealings, such as multiple years of returns not filed, whereas a tax mistake describes simple filing errors or deductions taken incorrectly. Many tax issues have the potential to bring forth liens and incur audits, or in the long term, cripple the finances of an entity.
Common tax problems include unpaid taxes, filing inaccuracies, missed deadlines, and income underreporting, and can all invoke IRS action. Accurate bookkeeping, timely submission, thorough review of one’s return, and professional assistance when necessary can mitigate the risk of incurring such issues.
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This post will provide an outline of the common tax problems, their causes, and the most effective methods to avoid them.
Tax Mistakes vs Tax Problems: What’s the Difference?
Tax mistakes involve small, unintentional errors you make when filing taxes. Tax mistakes are generally one-off errors, with the most common mistakes being typing someone’s social security account number incorrectly, missing account numbers, selecting the wrong filing status, and income reporting. Tax mistakes appear when a deduction is not removed, or in other cases, claiming deductions for which the taxpayer is ineligible. Most of these errors can be sorted through amended return filing or responding to a notice from the IRS.
As a taxpayer, tax problems create a new concern. If tax issues are not resolved, the consequences can be severe. Tax problems are often persistent issues that arise from a lack of filing punctual information, ignoring filing deadlines, and a lack of proper tax policy understanding. Tax problems can arise for self-employed persons or sole proprietorships who often use basic tax software and don’t bother putting in the correctly required information.
Unlike common tax errors, tax problems prompt taxpayers to act urgently. Waiting to take care of taxes can put you at risk of getting sued, obtaining reputational damage, or getting a late submission fine, which comes as a result of missing the deadline. Working fast and efficiently with a hired tax expert can help eliminate these taxes easily. You can avoid errors through proactive measures and simple calculations.
Most Common Tax Problems Taxpayers Face
Tax problems can sneak up on anyone, especially when paper returns are involved or digital records are incomplete. Let’s break down the most common issues taxpayers face and how to spot and fix them before they get worse.
Owing Taxes You Can’t Afford to Pay
Many taxpayers end up with a surprise tax bill due to under-withholding, receiving freelance or 1099 income, or cashing in lump-sum gains like stock sales. When you can’t pay the full amount, fees and interest start adding up fast.
The IRS offers solutions like Installment Agreements, Offers in Compromise, or declaring your account Currently Not Collectible due to hardship. These are options that can help you avoid leaving money on the table by missing available relief.
Getting IRS Notices or Letters You Don’t Understand
IRS systems flag common errors, such as inconsistencies with reported income or filing status, before taxpayers are alerted. Notices like CP2000 (mismatched income), CP14 (balance due), or CP504 (final notice before levy) can be confusing and stressful.
It’s important to read these notices carefully, respond by the stated deadline, and seek professional help if you’re unsure. Ignoring them can lead to enforcement actions or missed opportunities to fix errors.
Facing an IRS Audit
Audits can be triggered by more than just a common tax mistake. They can result from claiming deductions that seem excessive, incorrect filing status, or inconsistencies in tax records. Audits come in three forms: correspondence, office, and field.
If you’re being audited, gather all your documentation, double-check your figures, respond promptly, and consider hiring a tax professional to guide you through the process.
Having a Federal Tax Lien or Levy Filed Against You
A lien is a legal claim on your assets, while a levy means the IRS is actively taking your property, income, or bank funds. Both severely damage your credit and financial stability. To remove or avoid them, address tax debts early, apply for a payment plan, or seek professional help for resolution.
Dealing with Identity Theft and Fraudulent Tax Returns
Scammers can use your stolen data to file false returns and claim refunds in your name. Warning signs include IRS letters about a return you didn’t file or a rejection when filing your own.
Act fast by submitting IRS Form 14039, requesting an Identity Protection PIN, and reporting the fraud immediately.
Not Filing Taxes for Multiple Years
Fear, confusion, or financial hardship are examples of some of the various reasons people skip filing their taxes. However, non-filing can lead to steep fines, loss of refunds, and even IRS-prepared returns that don’t work in your favor. To fix this, gather records and file all missing returns with professional help.
Misclassifying Employees or Contractors (for Business Owners)
Mislabeling workers as independent contractors instead of employees can trigger audits and payroll tax fees. The IRS looks at control, financial relationship, and the nature of the work. Use IRS guidelines to determine proper classification and correct past mistakes with amended filings.
Problems with Estimated Taxes (Freelancers & Self-Employed)
If you’re self-employed or earn non-wage income, you’re responsible for making quarterly estimated tax payments. Missing payments or underpaying can lead to IRS penalties.
Learn how to calculate your taxes properly to avoid math errors and set reminders to stay on schedule.
Issues Reporting Foreign Accounts or Income
If you have money abroad, you may need to file FBAR or FATCA forms to report foreign assets. Failure to report can result in massive charges and potential audits. If you’re unsure whether you need to file, speak to a tax professional familiar with international reporting.
Divorce or Inheritance Tax Disputes
Divorce can create tax complications, such as who’s liable for joint returns or who claims dependents. Inheritances may also bring unexpected tax bills or disputes among beneficiaries. Legal and tax professionals can help clarify responsibilities and resolve conflicts fairly.
How to Resolve Serious Tax Issues
Dealing with serious tax problems starts with spotting inconvenient indicators early. Don’t ignore increasing balances, overdue returns, or receiving IRS and state notices. These are signs of something that requires immediate attention. Mails from the IRS are better off not being ignored, as they can lead to things such as a lien, levies, or even wage garnishment. To avoid such scenarios, it is always a good idea to file returns on time, or at the very least, double-check filings to evade common errors.
In more complicated situations, a tax professional is always the best route to take. Simple errors can be fixed with DIY tax solutions, but serious problems like large debts, audits, or even legal threats require the assistance of a CPA, Tax Attorney, or Enrolled Agent. These experts can help in finding gaps with the needed information, ensure all documents are submitted, and even represent you with the IRS to negotiate a payment plan. They also help in confirming the legal expenses they are eligible to claim, and if certain relief programs are applicable.
The IRS has programs and tools that can aid in tax issues. Its transcript tools, payment calculators, and the option to create an IRS account aid in tracking the taxpayer’s status. Programs like the Fresh Start Initiative may help you qualify for installment agreements or even reduce your debt through an Offer in Compromise, especially when handled with professional guidance.
When to Get Help from a Tax Attorney
You should consider getting help from a tax attorney when your tax situation goes beyond what you can handle alone. If you are in debt for more than you can pay, haven’t filed in several years, or receive an IRS notice like a CP2000 or audit letter, it’s time to bring in a legal professional. Tax attorneys can help you understand your rights, deal directly with the IRS on your behalf, and work toward a solution that minimizes penalties and protects your finances.
It’s important to seek legal help if the IRS is threatening you with liens, levies, or wage garnishments. In addition, you should also seek the help of a tax attorney if you own a business facing complex issues like payroll tax problems or disputes over worker classification. These situations can lead to serious legal and financial consequences if mishandled. A tax attorney brings the experience and authority needed to manage high-stakes cases and guide you safely through the resolution process.
Need Legal Assistance for a Tax Issue?
If you have unfiled returns, an outstanding tax debt, or you’re facing enforcement actions such as liens or audits, this blog has discussed how these serious tax matters have consequences and why a prompt resolution, like filing necessary forms, is extremely important.
You have also learned how to tell the difference between a tax mistake and a tax problem, and the importance of licensed professionals, such as CPAs, Enrolled Agents, or tax attorneys, and why their experience makes a difference in resolving your case effectively by helping you gather missing information and safeguarding your finances.
Having the right information is as important as having the right professionals. Be it business-related tax issues, IRS notices that you seem to be unable to manage, or something as serious as unpaid taxes, a good tax attorney will provide legal protection, negotiate with the IRS on your behalf, navigate you through complex legislation, and much more. Don’t wait for the tax problem to escalate. Seek legal assistance to avoid additional penalties, check for tax program eligibility, and take control of the tax matter at hand.
With licensed tax attorneys based in Los Angeles and over $91 million saved since 2017, Victory Tax Lawyers has the legal experience to handle even your toughest IRS issues and make the process as stress-free as possible. Need help fast? Contact us today to get started.
Frequently Asked Questions
Here are some of the most frequently asked questions about common tax problems:
What Should I Do if I Get a Letter From the IRS?
If you get a letter from the IRS, read it carefully, don’t ignore it, and respond or seek professional help promptly to avoid penalties or further action.
How Do I Set Up a Payment Plan With the IRS?
You can set up a payment plan with the IRS online, by phone, or by submitting Form 9465, depending on the amount you owe and your financial situation.
Will the IRS Really Put a Lien on My House or Bank Account?
Yes, if you ignore unpaid tax debt, the IRS can place a lien on your house, bank account, or other property to secure the amount you owe.
How Long Does the IRS Have to Audit Me?
The IRS generally has three years from the date you file your return to audit you, but that period can extend to six years or more if they suspect substantial errors or fraud.
What if I Haven’t Filed Taxes in 5+ Years?
If you haven’t filed taxes in over 5 years, it’s important to act quickly. The IRS can file for you, assess penalties, or take enforcement action, but you may still qualify for relief by voluntarily catching up.
Is Tax Identity Theft Common?
Yes, tax identity theft is becoming increasingly common, especially during tax season, as scammers use stolen personal information to file false returns and claim refunds.
Can a Tax Professional Really Stop IRS Enforcement?
Yes, a qualified tax professional, like a tax attorney, CPA, or enrolled agent, can often stop or delay IRS enforcement by helping you negotiate payment plans, filing appeals, or requesting relief programs on your behalf.
