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Avoid Problems with the IRS

IRS tax auditor man with a stern or mean expression
Don’t get in trouble with the taxman

Few things are worse than exorbitant penalties. If you want to avoid these fines — and we don’t know anyone who doesn’t — then you need to avoid problems with the IRS at all costs.

We understand that keeping yourself informed can seem overwhelming, especially if you’re starting with no prior knowledge. So, to help make your life easier and make sure that declaring your taxes each year isn’t too much of a headache, we’ve compiled a guide on how you can avoid the most common issues.

You’ll learn:

  • What the IRS is and how it works
  • How to pay your taxes correctly
  • Common myths about taxes
  • What happens if you don’t pay
  • Your moral obligation to contribute

If you still need some help after reading, we can give you personalized support. Here at Defensa Fiscal Profesional, we offer professional advice for all your tax and accountancy issues.

IMPORTANT NOTICE: Due to Covid-19, the IRS has extended the deadline for filing taxes to July 15. You don’t need to fill out a special form to be eligible, but if you miss the new deadline, you’ll still face fines and penalties.

How the IRS works

As you’re probably aware already, the IRS stands for Internal Revenue Service. The organization collects taxpayers’ money, offers assistance, and hands out penalties in the case of misconduct. It also oversees tax laws through the Internal Revenue Code.

Most of the time, you won’t have much contact with them beyond filing your taxes each year, unless there’s a problem with your tax return. However, the elusive nature of the organization has led to some unhelpful misconceptions.

The Treasury Department building is a famous landmark in Washington DC
The IRS is your friend not your foe

Common myths about the IRS

Some people think the IRS carries out some kind of modern era witch hunt, but they forget about the flexibility and support offered. Whether you miss the deadline, fill out your form incorrectly, or don’t know which form to use, the IRS always gives options and solutions. Work with them, not against them.

Think of the IRS as your friend, not your enemy. Besides, once the government collects your money, they give it back to you in the form of public goods and services. This benefits everyone.

However, it’s true that the IRS has very strict rules and timeframes for you to follow. It’s incredibly frustrating to receive a large penalty just because you filed your declaration a couple of days late.

If this happens to you, don’t panic. The most organized people in the world miss deadlines sometimes. You’ll find plenty of resources telling you what to do on the IRS site, for everything from filing an extension to figuring out which tax form to use.

If you need more help, you can contact a professional tax consultancy, like Defensa Fiscal Profesional.

Types of taxes

Now that we’ve established how the IRS works and busted some common myths, it’s worth explaining the different taxes that exist in the United States. We talk about “taxes” as if they’re one congruent unity, but this isn’t strictly true. There are many types of taxes.

Depending on how you work, how much you earn, and what you do with that money, you’ll encounter different types of taxes. 

Here’s a quick breakdown of the most common types of taxes:

  • Income tax
  • Social security tax
  • Sales tax
  • Capital gains tax
  • Estate tax
  • Property tax

This isn’t an exhaustive list, but it’s a good place to start.

Macro view of 1040 US Tax Form, calculator and ballpoint pen
It’s helpful to be aware of taxes and how they work

Income tax

Chances are, you already have a vague idea of what income tax is: it’s the percentage of your earnings that you never see because they go straight to the government. Or, if you’re self-employed, the percentage you save and pay on a quarterly basis.

What you might not know is exactly how it’s calculated.

The good news is that the taxman isn’t arbitrary or unjust: those with the highest incomes pay the most. Instead of a regressive policy where everyone pays the same fixed tax rate, the US has a progressive policy where everyone pays a slightly different amount depending on their salary.

The income tax rates are as follows for the tax year 2020:

  • Incomes over $9,875 (or $19,750 filing jointly): 12%
  • Incomes over $40,125 (or $80,250 filing jointly): 22%
  • Incomes over $85,525 (or $171,050 filing jointly): 24%
  • Incomes over $163,300 (or $326,600 filing jointly): 32%
  • Iincomes over $207,350 (or $414,700 filing jointly): 35%

FICA tax

It’s not just income tax you have to pay on your wages, unfortunately. You must also pay social security taxes, known as Federal Insurance Contribution Act (FICA) taxes after the organization that authorizes them.

Unlike income tax, social security tax is a regressive policy, meaning it hits low earners harder than their high-earning counterparts. 

Yet it’s not all bad. Think of FICA taxes like an insurance policy — they pay for essential services like Medicare and unemployment benefits.  As we’ve touched on already, the IRS isn’t the bad guy: they collect taxes not for their own good but for the greater good of society. 

Sales tax

You might also have heard of sales taxes, the tax you pay on all purchases. That isn’t to say that an IRS representative will pop up out of nowhere asking for tax money as you leave the mall; the sales tax is added onto the final price of each item, so you won’t even notice you’re paying it.

Other types of taxes

If you invest your money outside of a tax-efficient account like an IRA, you also need to consider capital gains tax. Whenever you sell an investment, you need to pay a portion of the profit to the IRA, including sales of real estate (although primary residences have generous thresholds). The rate currently stands at 20%.

Estate taxes apply to inheritance — but only anything over the value of $5.43 million. The more inheritance passed on, the greater the tax rate, ranging from 1% to 40%.  Luckily, there are a few loopholes If you’re due to receive an inheritance or pass one on, make sure you manage and invest it wisely.

Local governments impose property taxes, or ad valorem taxes, on personal property and real estate. The revenue goes toward public services in the local area, like schools.

Infographic about the main types of taxes
Make sure you know your sales tax from your estate tax

Problems when paying taxes

Once every year, a special day comes around: the tax filing deadline on April 15. Nobody can run or hide from it — in theory, they could, but it would be highly unethical and lead to a potential prison sentence. We don’t recommend it!

Sometimes, even those with the best intentions run into problems. It’s understandable, but make sure you solve them as soon as possible — fines for non-compliance are very high. Here’s what to look out for.

Minor errors

Tax forms can be tricky to fill in correctly, so many people make simple mistakes. Here are some frequent errors:

  • Making spelling mistakes
  • Not signing the form
  • Writing your name incorrectly
  • Using the wrong form
  • Making errors in your calculations
  • Miswriting your Social Security Number (SSN) or forgetting to write it at all

However,  there are also more serious problems involved in your tax filing. For instance, you might have missed a payment, made a late payment or have failed to file your tax return.

Sometimes you might be contacted through no fault of your own — perhaps the IRS owes you a refund, needs to verify your identity, requires further information, or there’s been a delay in processing your refund. However, it’s still your responsibility to sort these matters out as soon as possible.

Paper balls and pen over blank white sheet - Creativity crisis concept
Don’t get caught out by silly errors

Further considerations

If you’re self-employed, it’s tempting to ignore taxes altogether. This is a recipe for disaster and can land you in big trouble. While you’re on your journey to labor independence, make sure you know which tax form to file and how to manage your finances.

For business owners, freelancers, or anyone else who can make deductions, make sure you have proof. Claiming deductions that you don’t have any evidence is like playing with fire!

Whether you’re a sole proprietor, employee, or anything else, always tell the truth about your income. You may think you’ll get away with lying, but the IRS know more than you think! If you’re not earning as much as other people in similar jobs, it looks suspicious.

What to do

If you receive a letter from the IRS, don’t panic. First, read the document and instructions carefully, then check how long you have to respond. Meeting a deadline ensures you avoid any additional penalties and also reflects favorably on you in case you need to make an appeal.

Whatever you do, don’t ignore the request — even if you’re unable to make a payment, it’s always best to respond in some way. As we’ll discuss in further detail later, the IRS is flexible and may offer to reduce your debt or give you a payment plan.

If your return has been changed, compare it to the original return you made. Keep both documents safe — they could be requested as part of the process.

Infographic about filing taxes correctly
Always re-read your tax form before submitting it

The IRS offers multiple solutions

Don’t suffer in silence. As soon as you know something has gone wrong with your tax return, contact the IRS. Talking with an expert is also a great way of learning more about filing taxes and ensuring you don’t make the same mistake twice.

Offer in compromise

If you receive a penalty and lack the financial means to pay it, the IRS will most likely give you the chance to make an offer in compromise. This will lower the size of the penalty you owe. However, you’ll have to prove you genuinely face financial hardship first. The IRS will account for your assets, income, expenses, and punctuality.

Remember it’s very rare for the IRS to allow offers in compromise, and it’s a very long process. However, it’s well worth applying if you have no other means of paying. 

Even if the IRS isn’t willing to write off your debt completely, they might grant you a penalty reduction — particularly if you have a good record and it’s your first time receiving a fine.

Payment plan

A more common solution is to pay your debt using a payment plan. If the IRS can see you’re going through a bad economic streak but you still have income or assets, they’re more likely to offer you a payment plan than to reduce or write off your debt.

This means you’ll pay a set amount each month until you pay the total amount. As long as you’re an individual who owes $50,000 or less or a business owing a maximum of $25,000 in payroll taxes, and you’ve submitted all your returns and forms, you’re eligible to apply.

Like any other settlement, you must submit proof of your personal circumstances to the IRS. It’s a simple process that you can carry out from home, but remember to read the instructions carefully.

Innocent spouse relief

This special case is still worth mentioning. Some couples file their returns jointly, which means they share federal tax debt and responsibility. However, if your spouse filed the taxes for you on your behalf without your knowledge, you may be able to file for innocent spouse relief on anything resulting errors or fines.

To apply, you must submit the form to the IRS within two years of the original charge. 

Similarly, if you separate from your partner, you can split your tax burden using Separation of Liability Relief, so you only pay what you owe personally. If you can’t claim either, you may still be eligible for Equitable Relief for items not reported wrong on a joint return or taxes not paid on a joint return.

Infographic about IRS solutions to tax debt
If you find yourself with debts, there are various options available

IRS Independent Office of Appeals

The IRS has an independent organization called the Independent Office of Appeals, which solves the fiscal problems of 100,000 citizens every year. By dealing with appeals internally, they remove the need for tax courts, saving valuable time and resources for everyone.

The Independent Office of Appeals office helps taxpayers who couldn’t reach fiscal agreements with the government and uses mediation as a key tool. You can file an appeal for fines, adjustment examination, interest, penalties, the recovery of your trust fund, an offer in compromise, or a lien.

The appeals process

After you file an audit or collection and go through the Independent Office of Appeals, the IRS will send you a report explaining the adjustments or actions they intend to carry out. 

You’ll then have the right to request an appellant, settlement officer, or a conference. 

If you request an appeals conference (informal meeting), you can appear independently or with an attorney, accountant, or a representative from the IRS.

If you can’t agree, you can appeal in external courts, but this is usually reserved for extreme cases, not least for the expense.

Infographic about making an appeal with the IRS
The Independent Office is a great alternative to

Alternative solutions

If you can’t afford to pay your debt upfront and you’re not eligible for any of the solutions above offered by the IRS, you might prefer to turn to a private provider. Two popular ways of financing debt are through credit card or mortgage loans. 

Credit card loans

Most people have credit cards, so it’s often the first solution we think of when we need access to money. The IRS accept payments from all major credit card providers, including MasterCard, Discover, and American Express.

You can arrange payments by phone, and the IRS operator will take the information they need.

However, remember credit card loans can be extortionate. Try to pay as much as you can toward your credit card bill each month — and whatever you do, don’t miss your minimum payment. 

Mortgage loans

If you have a mortgage for a property, you can sometimes use a home equity loan (HELOC) to find money to pay your debt. Effectively, this means you’ll be using the value associated with your home as a loan.

It can be a smart move since you already own a percentage of your property value, giving you access to lower rates (typically 5% or 7%). In fact, the IRS recommends this option — but it also means you’ll be paying off your mortgage for longer. 

Client signing a contract for a home
A HELOC can be a great way to access some cash

Consequences of not paying tax

You might wonder what will happen if you can’t pay off your tax debt. We’ll tell you now: things can get nasty. If you receive the letter from the IRS titled “Final Notice of Intent to Levy” or “Notice of Right to Hearing,” you know you need to seek professional help.

Eventually, the IRS may seize your account, allowing the legal seizure of your property to pay a tax debt. This will also involve seizing your salary, taking the money from your bank accounts, and selling personal property including your vehicle or property. 

You could receive a federal tax lien or a levy, two serious yet different notifices.

Liens

A federal tax lien is the right of the government to your property if you neglect your tax debt. Things will only progress to this stage if you receive a Notice and Demand for Payment and ignore it without paying. Creditors will receive a Notice of Federal Tax Lien from the government letting them know you’ve lost the right to your personal property.

Nobody wants to lose their house or other assets — but if this wasn’t bad enough, you’ll also find it impossible to access credit at this point. Business owners may even find their company go bankrupt.

The government won’t seize your property; they’re simply reserving the right to do so. Pay the tax debt promptly and the government will remove the lien within 30 days. However, fail to do so and you’ll be subject to a levy.

Levies

While a lien is a threat and legal claim, a levy involves the actual seizure of your property. Most commonly this results in the seizure of wages until your debt is covered, the IRS could also seize other forms of private property.

It’s far worse to receive a levy from the IRS than from other creditors, because they have the right to seize much more from you without a trial. This isn’t just an empty threat.

There are few options to stop the government taking your salary. You can still file form Form 656, or Offer in Compromise, if you can prove financial hardship. However, the best time to apply is before receiving a levy. 

Infographic about liens and levies
Beware of liens and levies

Make sure you avoid problems with the IRS

Facing tax debt or other issues with the IRS is an unenviable position to be in, but it can happen to anyone. Remember, you don’t have to face it alone.

Professional legal or fiscal advice might seem like an expense you can’t afford, but it affords you peace of mind and time — and potentially even saves you from bankruptcy or losing your personal property.

Here at Defensa Fiscal Profesional, we want to make sure you avoid problems with the IRS. Contact us,  call us on +1 (704) 243-6333, or visit our office located at 4801 E Independence Blvd, Charlotte, NC  28212.