Paying taxes is a civic responsibility that every hardworking American encounters. Yet, the intricate maze of tax regulations can often lead individuals into IRS trouble, whether due to unintentional oversight or deliberate actions. In this post, we’ll discuss common tax pitfalls that often attract IRS attention and some practical tips to steer clear of these issues.
10 Common Tax Pitfalls To Avoid
Here are the top 10 ways taxpayers often get into IRS trouble that you should certainly want to avoid.
1. Neglecting to File Tax Returns
One surefire way to attract IRS scrutiny is by not filing a tax return. Some individuals, especially those expecting a tax bill, may choose to skip filing. However, this can result in failure-to-file penalties, and the IRS will not overlook it. Not to mention, failure to file legally required tax returns can result in imprisonment for up to a year and a fine of $10,000 per return.
2. Inaccurate Income Reporting
Whether intentional or accidental, underreporting income is a red flag. Discrepancies between income reported by employers (via W-2s or 1099s) and what’s declared on your tax return can trigger audits.
3. Overclaiming Deductions
While deductions can substantially lower your tax liability, claiming excessive or unjustified deductions can spell trouble. This includes inflating charitable contributions or exaggerating business expenses.
4. Disregarding IRS Notices
The IRS frequently issues notices for minor inconsistencies or requests for additional documentation. Ignoring these notices can exacerbate the situation, resulting in graver consequences.
5. Involvement in Tax Evasion Schemes
Participating in illegal schemes, such as hiding money in offshore accounts or participating in identity theft and fraudulent returns, can result in criminal charges. It’s not a crime to use the tax code legally to minimize your taxes. However, some individuals become overly creative or receive misguided advice. Consult a tax professional before attempting to reduce your tax liability through such schemes.
6. Misclassifying Employees
Business owners may misclassify workers as independent contractors instead of employees to save on taxes. However, if the IRS determines that this is a misclassification, it can lead to back taxes and penalties.
7. Neglecting Estimated Tax Payments
Self-employed individuals and certain other taxpayers are often required to make quarterly estimated tax payments. Failure to fulfill these payments or underestimating their amounts can lead to penalties and often result in an unexpected tax bill.
8. Failing to Report Foreign Income
U.S. citizens and resident aliens are generally obligated to report their worldwide income, including income from foreign trusts and bank accounts. Omitting or intentionally overlooking this can result in substantial penalties.
9. Participating in High-Cash Businesses
Businesses that primarily deal in cash transactions, such as restaurants, construction, or salons, often attract IRS scrutiny for underreporting income. Keeping accurate records is important in case of an audit.
10. Disregarding State Tax Obligations
While much attention is placed on federal taxes, individuals also have state tax obligations. Failing to file state tax returns or evading state tax payments can spark complications at the state level.
What to Do If You Encounter Tax Trouble?
Once IRS issues surface, they can snowball quickly, leading to substantial fines, penalties, or even legal actions. Being aware of these common pitfalls and ensuring compliance can help individuals maintain a clean tax record and avoid unnecessary entanglements with tax authorities. When in doubt, it’s always advisable to seek guidance from tax professionals or experts in the field.
If you currently find yourself facing IRS problems and owe $10,000 or more in back taxes or are undergoing an audit, don’t hesitate to reach out to our tax resolution firm. We’re available to schedule a free and confidential consultation to thoroughly explain your options and assist you in permanently resolving your tax issues.