For many people, dealing with the IRS isn’t too difficult. They file a tax return each year, and either enjoy a refund or pay the balance due. But for others, dealing with the IRS is a little more fraught with challenges. Those challenges could come from a simple mistake—either on the part of the IRS or the taxpayer—or they may occur when you can’t pay the balance due or your tax return is selected for audit. Whatever the cause, handling IRS problems successfully means following certain rules and knowing your rights. Here are five of the biggest mistakes people make in dealing with the IRS.
Mistake #1: Not opening your mail
In this era of email and paperless billing, who sends mail anymore? The IRS does, and if they have important information for you, your mailbox is the first place you’ll hear about it.
Some people don’t check their mail very often because it’s typically full of junk. Others avoid opening envelopes addressed from the IRS because they just dread hearing what the IRS has to say. But ignoring IRS correspondence won’t make them go away. In fact, it could make your problems worse. If you owe money, delays will just incur more interest and penalties on your taxes, and failing to respond could mean losing out on some of the rights you would have had to contest IRS decisions.
Mistake #2: Trying to deal with the IRS on your own
Many people hesitate to call in a pro to deal with their tax issues because they think it will cost too much. You already have to pay a hefty bill to the IRS, so why add professional fees on top of it, right? But that’s a mistake that can end up costing you significantly.
When you try to negotiate with the IRS on your own, you could end up paying more than if you’d called in a pro. IRS employees may seem helpful, but their number one goal is to collect the balance you owe and close their file as quickly as possible. They aren’t required to advise you of your best options, and they may be better trained at following their procedural manual than interpreting and applying the tax code.
Hiring a pro costs money, but their interest is in getting the most favorable outcome for you—not the Treasury coffers.
Mistake #3: Letting the IRS prepare a return on your behalf
If you haven’t filed a return in several years, the IRS can prepare a Substitute for Return (SFR) on your behalf and bill you for the balance they say is due. They’ll deal with the hassle of filing for you. Great, right? Not necessarily.
When the IRS files an SFR, they’ll file a return with no dependents and no deductions. They may file your return using a Single status even though you’re eligible for Head of Household. If you sold stock and the basis isn’t reported to the IRS by your broker, the IRS will assume your basis is zero and tax all of the proceeds as capital gains. Other deductions, such as medical expenses and charitable deductions aren’t reported to the IRS, so they’re left off entirely.
It’s almost a guarantee that you’ll owe a larger amount than if you filed on your own. The good news is that you can have an SFR amended. So if the IRS has already filed on your behalf, contact a professional right away to prepare an original (and correct) return.
Mistake #4: Failing to document everything
The IRS is a massive agency. Mail gets lost, payments get misapplied and unfortunately, sometimes promises get broken. In these cases, your best defense is a complete record of all correspondence and conversations.
When you mail returns, extension requests, or letters to the IRS, send them Certified Mail Return Receipt Requested, so you’ll have proof of the mailing date. Keep copies of all correspondence received from the IRS. When you make a payment online, keep a copy of the receipt that shows the payment confirmation number. When you have a phone conversation with an IRS employee, maintain a record of the date, their name and badge number, and notes about the call. If an IRS agent agrees to anything, get it in writing.
Mistake #5: Taking “no” for an answer
Many people don’t realize that an IRS assessment, including those for penalties and interest, is not the final word. When the IRS sends a report or letter explaining their proposed adjustment to your balance due or their collection action, buried in the legal jargon is an explanation of your right to appeal their decision and an explanation on how to ask for an appeal.
An appeals conference is an informal meeting in which an impartial officer settles a dispute between a taxpayer and the IRS, in the same way an arbitration officer settles a legal dispute. The goal is to resolve the disagreement without having to go to court.
The catch is, you must file your appeal within the designated timeframe, usually 30 days from the date on the letter (another good reason to open all IRS correspondence immediately).
You are entitled to hire a professional to represent you during the appeals process, as long as that professional is authorized to practice before the IRS. Only licensed enrolled agents, attorneys, and CPAs are authorized to represent you during the appeals process.
If you’ve made any of these mistakes in dealing with the IRS, don’t lose hope. There may still be options for resolving your tax issues. The key is to take action immediately and work with a professional who has experience in dealing with the IRS. The IRS has a great deal of power when it comes to enforcing laws and collecting taxes, but taxpayers have rights as well. Know yours, and you’ll be in a better position for dealing with the IRS successfully.
For more pro tips on dealing with the IRS, check out this post.
Learn more about Landmark Tax Group here.