Don’t Take Tax Problems into the Coming Year

December 07, 2015 : Jim Buttonow

Tax problems – like IRS notices, audits and penalties – can be stressful. They’re even more stressful if you ignore them. As this year comes to a close, take these three steps to ensure you don’t bring any old problems into the new year.

Tax problems are pretty common

If you do have an issue, you’re not alone. Every year, millions of taxpayers face an IRS issue. The most common issues are:

  • Penalties: The IRS charges more than 40 million penalties every year.
  • Audits: There are about 1.4 million IRS audits each year – and some last well over a year.
  • CP2000 or underreporting notices: The IRS sends these notices to 4 million taxpayers every year. IRS systems automatically send them when income reported on tax returns doesn’t match information the IRS gets from employers and other payers. The mismatch triggers a notice that asks for explanation and proposes additional taxes.
  • IRS bills: Currently, more than 17 million taxpayers owe the IRS and can’t pay.
  • Tax identity theft: Millions of taxpayers have had their personal information stolen during the past couple years. These taxpayers are at an increased risk that fraudsters will file a false return under their name next year.
  • Unfiled returns: The IRS has information showing that more than 7 million taxpayers don’t file their required return every year.

It’s true that many IRS issues can take months to resolve. But that should not stop you from taking steps to put any tax issues behind you for next year.

Here’s what to do:

  1. Fully understand what happened, and why. When you investigate your issue with the IRS, you’ll need to get to the underlying cause. For example, what seems to be an underreporting issue could really be caused by identity theft. Understanding exactly what caused your tax problem will help you prevent it from happening again.
  2. Pick the best option or options to fix it. Determining all of your potential solutions to resolve your issue – and picking the best one — may take a little work. For example, if you have an IRS penalty, you’d have to take a look at the five ways to get penalties removed and decide which ones apply to your situation.
  3. Don’t wait. Get started now. Once you’re moving forward with a solution, make sure to send the IRS a complete request or response. This will allow the IRS to make a determination with all of your facts. It will also avoid miscommunication that can lead to a prolonged interaction with the IRS. Meeting IRS deadlines is essential to avoiding a premature IRS decision on your situation. If you’ve already missed the deadline, don’t let that deter you from trying to solve your problem.

What does this process look like in practice? Here’s an example.

John received a notice. It says he owes $2,788 in taxes and a failure to pay penalty of $325 because he didn’t report income from a Form 1099 he received from his side business. John didn’t respond to the IRS about the notice. As a result, he got another notice saying that the taxes and penalty have been charged (or “assessed”) to his account.

First step, John needs to understand the issue and determine whether the IRS is correct. Then, he needs to understand how to fix it. Since John is confused about some of the wording – like “petitioning the Tax Court” – he gets help from a tax professional.

John’s tax pro first looks at the documents and confirms that the IRS is correct. John’s tax pro helps him report the additional income, but also helps him to declare business expenses that will reduce his total taxes. For John’s penalty, his tax pro will look at the options, such as first-time penalty abatement, to get the penalty removed. Lastly, John’s tax pro can handle the IRS response and follow-up so that John doesn’t have to navigate IRS phone lines.

The moral of the story: If you’re getting IRS notices or have any lingering tax issues, take steps to solve them now and avoid any possible consequences next year, including the IRS taking some or all of your refund.

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Jim Buttonow

Jim Buttonow

The Tax Institute, H&R Block

Jim, CPA, CITP, leads H&R Block efforts to help clients with tax problems. Jim serves as chairperson of the IRS Electronic Tax Administration Advisory Committee. He has more than 28 years of experience in IRS practice and procedure, including 19 years at the IRS.