No one can say United States tax code is easy. Unfortunately, even a simple mistake or overlooked form can end up costing you big in the form of penalties and interest. Here are the most common tax problems filers face each year and how to overcome them.
Failing to File
One of the most common but potentially serious tax issues is failing to file your taxes on time. Your federal tax return is due every year around April 15. If you miss this April deadline, the IRS can hit you with penalties for failing to file and failing to pay the amount you owe by the deadline.
The hefty penalty for filing late adds 5% of your unpaid taxes for every month your return is late up to 25% of the total unpaid amount. This penalty will begin accruing the day after the filing deadline.
The penalty for failing to pay your taxes on time, you will face a failure-to-pay penalty of 0.5% of your unpaid balance. This penalty will also apply for every month your taxes are unpaid.
The failure-to-file penalty is considerably greater than the failure-to-pay penalty. This is why you should always file on time, even if you can't afford to pay your tax balance. You can also request an extension from the IRS for additional time to prepare your return. Extensions are easy to get and popular with business owners and self-employed filers who need more time to gather documentation. Just remember that getting an extension of time to file doesn't give you more time to pay; you can still be on the hook for a failure-to-pay penalty.
To request an extension, you will need to file Form 4868 as an individual. Businesses and corporations use Form 7004 or 1138 to receive an extension. Once approved, you will have until mid-October to file.
Inability to Pay
If your tax bill is too high for you to pay now, don't ignore the problem. Otherwise, you may face wage garnishment and high fees and interest. You should still file your return on time and pay as much as you can. This can help you avoid penalties and interest on the unpaid balance.
The IRS offers several payment options and arrangements for people who are facing tax debt. Depending on your situation, you may be eligible for:
-- Short-term extension to pay
-- An installment agreement
-- The IRS Fresh Start program, which is designed to help you avoid a tax lien and pay back taxes
-- Offer in Compromise (OIC), which allows you to settle your debt for less than you owe based on your ability to pay
-- Currently Not Collectible (CNC) status
If you need more time to pay, remember that you must have filed your return to ask the IRS for an installment agreement or payment arrangement. Tax expert Saro Der Ohanessian says "My advice is to never ignore the IRS, they have more power than just about anyone in the federal government. They can make your life very unpleasant and miserable. If you're having tax debt issues it's in your best interest in dealing with the tax collectors and communicating with them in a prompt timely manner." You may also get the penalty waived if you can show reasonable cause for failing to pay your tax bill on time.
If you do not pay your taxes or take advantage of a payment arrangement, the IRS has the legal right to garnish your income without getting a judgment. Unlike wage garnishment from a creditor, the IRS can take more than 25% of your income. In fact, the IRS can legally take as much of your paycheck as it wants as long as you are left with enough to pay for basic living expenses.
If you are facing wage garnishment from the IRS, there is still a way to fix the problem. The IRS does not begin garnishing your wages before giving you notice and a chance to make an arrangement. If you are not able to pay the balance by the due date on the demand letter, set up a payment plan with the IRS or make a settlement offer.
To get rid of the levy against your wages, you will need to request a levy release. The IRS will release the levy if you can show that it is creating a financial burden or you can make payment arrangements. It may still be possible to set up an installment agreement with the IRS in exchange for releasing the garnishment.