5 Common Tax Problems and How to Avoid Them
In 2022, the Internal Revenue Service (IRS) received a whopping 165,774,000 tax returns. So there are plenty of people out there who probably will benefit from some of the advice we are about to provide you in this article.
Are you one of those people who dread the arrival of tax season? Do you feel overwhelmed by the paperwork and the looming deadline?
You’re not alone. Many people struggle with their income taxes, and even the most conscientious taxpayers can encounter problems. In this article, we’ll discuss the five most common tax problems and how to avoid them.
Let’s jump right into this!
1. IRS Tax Problems
The Internal Revenue Service (IRS) is the agency responsible for collecting federal taxes in the United States. If you owe the IRS money and fail to pay it, you may face severe consequences. The IRS can impose penalties and interest on unpaid taxes, seize your assets, and even file criminal charges against you.
To avoid IRS tax problems, make sure you file your taxes on time and pay any taxes owed by the deadline. If you can’t pay your taxes in full, contact the IRS and set up a payment plan. Ignoring the problem will only make it worse.
One of the most significant IRS tax problems is being audited. An audit is a review of your tax return by the IRS to ensure that all income, deductions, and credits claimed are accurate and supported by documentation. While audits can be random, some red flags may increase your likelihood of being audited, such as high-income earners, those claiming large deductions, or those with business losses.
To avoid being audited, be sure to keep accurate records, report all of your income, and only claim deductions and credits you’re entitled to. If you’re unsure about the validity of a deduction or credit, consult a tax professional. It’s also a good idea to file your taxes electronically, as e-filed returns have a lower error rate than paper returns.
2. Income Tax Problems
Income tax problems can arise when you fail to report all of your income, claim improper deductions, or take credits you’re not entitled to. The IRS has sophisticated algorithms that can flag returns for review if they contain unusual or inconsistent information.
To avoid income tax problems, make sure you report all of your income accurately and only claim the deductions and credits you’re entitled to. If you’re unsure about whether you’re eligible for a deduction or credit, consult a tax professional.
One of the most common income tax problems is underreporting income. This can happen when you receive income that’s not reported on a Form W-2 or Form 1099, or when you simply forget to report income on your tax return. Underreporting income can result in penalties and interest, and in some cases, criminal charges.
To avoid underreporting income, make sure you have all the necessary documentation, including Forms W-2 and 1099, before preparing your tax return. If you’re self-employed or have income from a side business, keep detailed records of all income received and expenses paid throughout the year. If you’re not sure whether you need to report a particular source of income, consult a tax professional.
3. Payroll Tax Problems
If you’re an employer, you must withhold and pay payroll taxes on behalf of your employees. Payroll tax problems can arise when you fail to withhold the correct amount of taxes, fail to remit payroll taxes on-time, or misclassify workers as independent contractors.
To avoid payroll tax problems, make sure you understand your obligations as an employer and comply with all federal and state payroll tax requirements. If you’re unsure about how to classify a worker, consult a tax professional.
Misclassifying Employees as Independent Contractors
One of the most significant payroll tax problems is misclassifying employees as independent contractors. Employers must withhold payroll taxes, such as Social Security and Medicare taxes, for employees, but not for independent contractors. If an employer misclassifies an employee as an independent contractor, they may be liable for back payroll taxes, penalties, and interest.
To avoid misclassifying employees as independent contractors, make sure you understand the difference between the two. Independent contractors typically have more control over their work and are responsible for their own taxes, while employees work under the direction and control of the employer. If you’re unsure whether someone should be classified as an employee or independent contractor, consult a tax professional.
4. Income Tax Preparer Problems
Many people rely on income tax preparers to prepare their taxes. Unfortunately, not all tax preparers are trustworthy or competent. Some preparers may make errors on your return or even commit fraud.
To avoid income tax preparer problems, make sure you choose a reputable tax preparer who has a valid Preparer Tax Identification Number (PTIN) from the IRS. Don’t be afraid to ask for references and check their credentials. If a preparer promises you a large refund or asks you to sign a blank return, run the other way.
5. Tax Preparation Problems
Tax preparation problems can arise when you fail to keep accurate records, miss deadlines, or don’t file your taxes at all. If you don’t file your taxes on time, you may face penalties and interest on any taxes owed.
To avoid tax preparation problems, keep accurate records throughout the year, including receipts, invoices, and bank statements. Don’t wait until the last minute to start preparing your taxes. If you’re struggling to file your taxes, consider hiring a tax professional to help you.
Here’s a link if you’re looking for a tax advisor near me.
Common Tax Problems to Be Aware Of
Tax season can be stressful, but it doesn’t have to be. By understanding the most common tax problems and how to avoid them, you can minimize your chances of running afoul of the IRS.
Remember to file your taxes on time, report all of your income, accurately, comply with all payroll tax requirements, choose a reputable tax preparer, and keep accurate records. With a little preparation and attention to detail, you can breeze through tax season with confidence.
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