IRS Consequences for Tax Return Errors and Underreporting
Old-school audits are infrequent in these cases. Since 2011, the individual audit rate has decreased from 1 percent to 0.4 percent. Criminal cases are likewise uncommon. Generally, the IRS is primarily concerned with collecting the money. And the world’s largest collection agency has the tools to get that money. This collection procedure usually begins with a “Dear Taxpayer” letter, which typically states that the IRS has “recalculated” the tax return.
Unpaid Taxes Must Be Paid or Otherwise Resolved
Due to the low audit and criminal referral rates, very few individuals who underreport their income or make mistakes on their tax returns require the services of accountants or lawyers. However, these individuals do need a certified tax planner to review their situations, outline their options, and offer advice in the future. Working with a tax pro before filing a return is an even better idea. Usually, a stitch in time saves nine.
Fight It
Many taxpayers receive payment due notices because they did not claim all the deductions to which they were entitled. If a certified tax planner files an amended return that reduces the taxpayer’s taxable income, the problem might essentially go away. Some commonly overlooked deductions include:
- Student Loan Interest: Many people overlook this deduction because they claim standard deductions and are unaware that they can still write off student loan interest. Most student loan payments are amortized (the debtor pays all interest for the life of the loan upfront). Recent graduates typically make interest-only student loan payments.
- Home Office Deduction: Many people fail to maximize the home office deduction. They take the “standard” HOD instead of doing the work and looking at the specifics. HOD reconsideration typically results in a significant reduction of taxable income.
- Medical Expenses: Under the broad IRS definition, medical expenses are not limited to doctor and hospital bills. This category also includes most ancillary medical expenses, like transportation and prescription drugs. Some taxpayers can also write off physical therapy costs and home renovations.
Tax debt is also dischargeable in bankruptcy if the debt is more than three years old and the filer meets specific other qualifications. Some legal defenses may also be available, such as the innocent spouse doctrine. A tax lawyer can determine if such options are legally available.
Pay It
As mentioned, if a taxpayer underreports income for any reason, the IRS typically only wants to recover the money. Therefore, several repayment options are available.
The installment agreement is the most common repayment tool. The IRS suspends collection activity while the taxpayer makes monthly payments. Almost everyone qualifies for installment agreements. However, the IRS does not reduce the amount owed and continues to charge penalties and interest on the unpaid principal balance (UPB) until the tax is paid in full.
Taxpayers who are not working and have no assets may qualify for uncollectible status. Once again, a lawyer can determine your options.
An OIC (Offer in Compromise) may also be available. The taxpayer makes a counteroffer, which the IRS must accept or reject. Typically, the IRS requires these taxpayers to liquidate most or all of their assets and use the proceeds to settle their tax debts.
For more information about tax resolution options, contact us online or call 610-933-3507.