Tax Problems – How to Effectively Handle

Tax problems can arise in many different forms. One of the more common tax problems for small business-owners involves payroll tax problems.  This is one of those tax problems the IRS aggressively pursues and one of those tax problems that can often become extremely problematic if not handled timely and effectively.

Often, payroll tax problems arise from a business either not filing a payroll tax form on time, or not filing the required form(s) at all.  Payroll tax problems can often be easily resolved if a business-owner made payroll tax deposits and simply had a problem with the form(s).  In such instances, the IRS will typically let the business-owner clear up the tax problems simply by getting the form(s) completed and to the IRS as soon as possible.  The IRS may assess a small penalty, but at least the tax problems have been resolved and don’t get worse.  These types of relatively minor tax problems don’t usually require the help from a tax professional.

The more serious tax problems arise when a business-owner fails to make the required payroll tax deposits on time and/or in the correct amounts. Serious tax problems can arise when business-owners are also the businesses’ only employees.  The owners sometimes don’t appreciate they’ve still got to adhere to specific deposit requirements for themselves as employees. Tax problems are created when required deposits are not made.  These mandatory deposits include: 1) Medicare tax; 2) Social Security tax; 3) Federal income tax; and Federal Unemployment tax.

In addition to withholding funds from their employees’ wages, and depositing those funds on their behalf to avoid tax problems, business owners are also required to pay a matching amount for some taxes. Business-owners are required to report some of their tax liabilities to the government on a quarterly basis (see IRS Form 941) while other tax liabilities are to be reported annually (see IRS Form 940).

To avoid tax problems, you shouldn’t confuse reporting with depositing. Many payroll tax problems arise when a business-owners doesn’t understand that these are two entirely different processes. As you might expect, reporting tells the government how much the business-owner owes. But depositing is the process of actually sending the government the money in a timely manner and in the correct amount.  To avoid tax problems, it is often advisable to get assistance from a competent tax return preparer familiar with payroll tax requirements and other business tax reporting.

Depending upon the size of the business’ regular payroll, the business-owner may be required to make payroll tax deposits either semi-weekly or monthly. To avoid serious tax problems it is important to understand the IRS will determine how often the business is required to make deposits. It’s at least equally as important the business adheres to the IRS’s schedule. It is not up to the business, but rather the IRS to choose whether the business must make semi-weekly or month deposits.  Serious tax problems can arise if the business does not make timely periodic deposits in accordance with the IRS’s schedule.

Business-owners who find themselves with payroll tax problems ordinarily end-up there because they miss one or more required payroll tax deposits. Whether the business-owner simply forgot to make a deposit, or he/she didn’t have the money and planned to “catch up later,” the outcome is the same.  You’ve got big tax problems and need to get them fixed sooner, as opposed to later.

Tax problems arise once the business misses even one deposit.  Thereafter, the business will start receiving an automated series of letters from the government discussing the nature and extent of the tax problems. These letters may start out fairly cordial but, before the business-owner realizes it, the IRS has started threatening civil and legal penalties including fines, interest, penalties, and, in extreme cases, criminal prosecution if the tax problems are not immediately resolved.

When such occasions arise, it may be extremely helpful to a business-owner to seek out professional help to deal with the tax problems.  If the business can solve the tax problems immediately either by filing the missing tax reporting forms (940 and/or 941), and/or making the missing deposit(s) then it is strongly advisable to consider just filing the forms, paying the taxes as well as the fines, interest and penalties to quickly resolve the tax problems.  Most would agree that’s probably the cheapest and easiest solution to fixing these types of tax problems.

If however, the business’ payroll tax problems reach a more serious level, the business will most likely need to engage a tax professional to handle the tax problems with the IRS.  Retaining an IRS tax attorney is typically a business’ best choice for dealing with more serious types of tax problems.

Ordinarily, an IRS tax lawyer can effectively resolve the business’ tax problems and achieve the best possible outcome. While a resolution of those tax problems will never include relieving the business of its responsibilities to make the payroll tax deposits, an IRS tax attorney may be able to successfully remove or reduce the amount the business has been assessed in the way of fines, interest and/or penalties associated with those tax problems.

Payroll tax problems are not, however, the only types of tax problems Americans face on a regular basis.  On occasion, tax problems may even arise from mistakes made by the IRS.  While no-one expects the federal government to be perfect and avoid making all mistakes, consider some of the recent revelations about the mistakes the IRS has made.  One can’t help but feel some concern over the tax problems created by the agency’s own oversights.

According to one official report, huge tax problems were created when the IRS paid out approximately $460 million dollars in tax credits to at least 67,100 Americans who were not eligible to receive those credits.   In fact, the report goes on to indicate that in approximately 47,500 instances, the taxpayers who had claimed they were eligible for the first-time homebuyer’s credit had, in fact, filed returns in previous years showing that they already owned a home.  While taxpayer fraud will almost always going to produce tax problems, in some of these instances the tax problems were further aggravated by the government’s own missteps.

Talk about tax problems, at least 67,100 overpayments were made despite 448,000 audited returns.  These are the type of tax problems which cause pause to question how these taxpayers managed to get over on the IRS.  IRS attorneys and other tax professionals suggest these tax problems arose from a serious failure in the system requiring an immediate and comprehensive overhaul.

If you are suffering from tax problems which you believe are the bi-product of an IRS mistake, you should immediately consult a competent tax lawyer or other tax professional to get help.  Mistakes may cause all types of tax problems, including the imposition of stiff fines, penalties and interest.

In the end, whether the IRS makes a mistake or not, your tax problems are ultimately your responsibility.  So pay close attention, particularly if you are relying on others to prepare your tax returns and manage your taxes proactively to avoid tax problems before they become tax problems.

Another form of difficulty raising tax problems is identity theft.  Tax identity theft is becoming a major problem in the United States and often raising numerous tax problems for the unsuspecting victims.   During congressional hearings last year, U.S. Senators went took on the IRS for what it described as a less than vigorous response to the tax problems being caused to the victims.

One of the more common methods for stealing someone’s identity is through the use of emails.  As you might expect, this is a particularly effective way of stealing information and creates all sorts of tax problems for the victim if they respond to the email.  In one version of an email scam, criminals pose as the IRS and email people about back taxes owing, or unfiled tax returns.  Sometimes taxpayers are even told their electronic tax returns did not go through and the taxpayers are invited to re-file their returns at a fraudulent website or risk having an unfiled tax return with penalties and interest attaching.  One can only imagine how may tax problems the criminal can create for their victims with this type of information.

Significantly, victims can avoid these tax problems by not responding to email purporting to be from the IRS.  The IRS wants you to know that it will never initiate communications with you through the use of email.  Any email claiming to be from the IRS is a scam and should be avoided to prevent possible tax problems from occurring.

Another way the unscrupulous access your tax information is by providing fake tax preparation services.  These “services” may be advertised on Internet listing sites or by fliers posted on telephone poles.  Again, a fraudulent tax preparation service may create all sorts of tax problems for the victim.  Often, one of the hooks used to lure you in is the promise of “free” services.  If you do need free tax preparation services, the IRS can often help taxpayers prepare their own returns without the assistance of a paid preparer.  This should go a long way to avoiding potential tax problems caused by a fraudulent tax preparer.

The IRS often suggests you take steps to make sure a tax preparer is legitimate and qualified.  Do your homework and checkout would-be tax professionals.  Again, this is very important if you don’t want to become an unsuspecting victim with huge tax problems.

Other IRS advice includes finding out whether the tax preparer is affiliated with a professional organization that requires continuing education and holds members accountable to a code of ethics.  In this regard, this past year the IRS started a registration and testing program for tax preparers which should help address the fraudulent tax preparation services problem and help millions of American avoid tax problems due to fraudulent tax preparation services.

The IRS also wants you to know that another way to help avoid tax problems is to make certain the paid tax preparer signs the return as required by law.  Avoid preparers who refuse to sign the return and/or claim they can obtain larger refunds as compared with other tax return preparers.  This is a red flag that using this person to prepare your taxes is likely to result in possible tax problems.  A legitimate tax return preparer will ask to see your receipts and will take the time to gather all the details regarding your tax situation.

You are encouraged to check out a potential preparer with organizations like the Better Business Bureau, the state’s board of accountancy for CPS, and the State Bar for IRS attorneys, and the IRS Office of Professional Responsibility for enrolled agents.  Again, doing some homework on the frontend will help avoid all sorts of tax problems on the backend.

Still more tax problems can arise for other reasons, like taxpayer error. If you are preparing your own tax returns attention to detail is essential to ensuring you don’t make mistakes.  Don’t forget to sign and date your returns.  Tax problems may be avoided by merely confirming your social security number is correct, and double-checking all your math (assuming you didn’t use the tax-software).

Despite the discussion above about tax problems caused by dishonest tax return preparers, don’t be afraid to ask a qualified tax return preparer questions.  You can also avoid tax problems by making sure you properly mail your payment to the IRS and there are sufficient funds in your account to cover the check.  Any of these mistakes can result in all sorts of tax problems like unfiled returns, owing back taxes, and could ultimately subject you to IRS wage garnishments, IRS wage levies, and/or IRS liens.

Late or unfiled tax returns can also result in tax problems such as penalties and interest. If left unchecked, those penalties and interest can end-up being as much as twenty-five percent (25%) of the back taxes you owe and can produce even more potential tax problems.

Other mistakes resulting in tax problems include taxpayers asking that their refunds be directed deposited into the wrong accounts or putting inadequate postage on their tax returns.  Again, such mistakes can be costly, will likely create all sorts of tax problems for you, and can result in financial hardships and uncomfortable entanglements with the IRS.  These are all tax problems which can be easily avoided by paying closer attention and asking questions of competent tax professionals if you need help.

Perhaps you and your former spouse are claiming the same dependent child when only one person may claim the dependent.  This is a fairly common mistake causing tax problems for divorced couples with children where joint custody has been ordered. If you find yourself in this quandary, your divorce decree will likely explain who is entitled to make such a claim.  Reviewing this question with a tax lawyer or your divorce lawyer in advance could save you a lot of headaches and prevent tax problems from arising from two or more incongruous dependent claims.

Other tax problems can arise from taxpayer mistakes when making a Work Pay credit or Homebuyer tax credit claim. These claims can be difficult and confusing and may result in unanticipated tax problems.  The Work Pay credit claims are complicated because most earners benefited from larger paychecks due to changes in the federal income tax withholding tables designed to implement the Making Work Pay credit.  But, taxpayers still need to complete Schedule M to claim a Work Pay credit on their tax returns to avoid tax problems.  In other words, even though you may have received the credit through the year by withholding, if you don’t claim it on your tax return you won’t get it and tax problems may arise.

Another way tax problems can occur is the Homebuyer tax credits. Since the financial upheaval in the U.S. economy, there have been various efforts to stabilize the housing market through such tax credits.  As you might expect, each year’s tax rules are a little different, thereby creating opportunities for numerous mistakes and a multitude of tax problems for millions of Americans.

We can’t say it enough, you should be very careful when it comes to your taxes and pay particular close attention to getting your returns completed and filed in a timely and correct manner.  Mistakes can be costly and will likely create multiple tax problems.

Donors to charities and political action committees (PACs) may, on occasion, also find themselves unexpectedly involved with unforeseen tax problems.  Particularly during this election year, potential tax problems may arise by virtue of many non-profit groups pouring millions of dollars into federal election campaigns. The latest trend has the IRS looking more closely at taxing donors making gifts to 501(c)(4) organizations.  Unsuspecting donors could be shocked to learn after the fact that their donations resulted in unexpected tax problems.

Typically, donors to these nonprofits are anonymous and their gifts are ordinarily not taxable. Obviously, if your donation is anonymous it is unlikely tax problems could arise, right?  Wrong, you could end-up having the nonprofit report your donation to the IRS even though you’d intended it to be anonymous.  A taxpayer’s failure to appreciate this consequence makes donations to 501(c)(3) organizations potentially problematic and could result in serious tax problems for unsophisticated/unaware donors.

Depending to whom the donation was made, the gift may be tax deductible.  Accordingly, as a taxpayer making such a donation you may wish to waive anonymity to claim the deduction on your taxes and could find yourself with unexpected tax problems. Even if you don’t claim the deduction and think your gift was anonymous you could learn the hard-way that anonymous may not mean anonymous and unforeseen tax problems have arisen.

The IRS is looking much closer at beginning to tax such donations and tax problems for millions of Americans may be on the horizon.  According to Ben Smith of Politico, “gifts to other political organizations are not taxable under federal law, and lawyers informally say many donors don’t typically pay the gift tax  – which may run as high as 35 percent, mirroring income tax rates – for contributions to 501(c)(4)’s.”

Significantly, following the U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission, the IRS and private tax attorneys across the country noted a spike in spending by these groups to fund political messages, using corporate money.  This spike helps to illuminate the scope of potential tax problems for the unsuspecting.

Tax lawyers explain that earlier 501(c)(4) regulations prevented nonprofits from using corporate money for advertisements mentioning federal candidates within 30 days of a primary election, or within 60 days of a general election.  However, changes in the law have created the potential for tax problems to those who haven’t kept up with the changes.

Specifically, while closer IRS scrutiny may very well be warranted, according to several tax attorneys the increased scrutiny may also produce tax problems for many unsuspecting taxpayers.  That’s because of findings like those of the Center for Responsive Politics, which suggest political spending by nonprofits which did not disclose donors rose from one percent (1%) of political spending by all outside groups to forty seven percent (47%) in just four (4) years, between the 2006 and 2010 elections.  This increase helps to illustrate the gravity of the potential tax problems arising from changes in the way the IRS views these donations.

Also, the heightened scrutiny will likely have a chilling effect on donations made to 501(c)(4)s which disclose donor information. IRS tax attorneys say that under current agency requirements, donors to political groups registered under section 527, like political action committees (P.A.C.s), do not have to pay taxes on their contributions, but must disclose the donor’s name and contribution amount if the donor gives more than two hundred dollars ($200).

Taxpayers who don’t understand the above requirements and/or are unprepared may find their names being unexpectedly disclosed to the IRS by the 501(c)(3). If you are a taxpayer who does not anticipate such disclosures you could find yourself with a wide-array of potential tax problems.

Because of new IRS enforcement, donors to groups registered as 501(c)(4)s would have to pay a tax on their gift to remain anonymous.  Failure to pay the tax would likely result in tax problems for the donors.  Tax lawyers suggest that contributors trying to decide between gifts to these different types of groups may now have to choose between disclosure and paying taxes on the gift.

Ultimately, it’s your responsibility to stay on top of your tax responsibilities and liabilities.  Owing back taxes and/or having unfiled tax returns and/or inaccurate/incomplete reporting can thrust you into the IRS collections machine where you might be subject to IRS garnishments, IRS levies, IRS liens and a whole host of tax problems.  The longer you are in the IRS collection process and avoid dealing with your tax problems, the worse your tax problems may become.

While as noted in this article tax problems can arise in numerous different ways, and those tax problems may produce a plethora of different consequences (expected and unexpected), dealing with your tax problems should they occur, in a prompt and responsible way will go a long way towards helping to keep those tax problems relatively minor.

Those who procrastinate and/or otherwise seek to avoid their tax problems by failing to deal with them immediately often find the price for their inaction very steep.  Unaddressed tax problems get bigger and almost never go away unless and until you deal with them.  If you don’t try to fix your tax problems quickly, fines, interest and penalties will continue to accrue against your unpaid tax liability and your tax problems will be harder and more expensive to fix.

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