It’s that time of the year again – when visions of sugar plums are replaced with visions of income taxes. If you’re like most people, you’re looking for ways to cut your tax burden as much as you can, without stepping outside the guidelines established by the IRS.
Many taxpayers may inadvertently get a little too enthusiastic in their efforts to cut their tax bills. Here are ten common mistakes we've seen in our practice that taxpayers make that can, and will, come back to haunt them:
1. Forgiveness of Credit Card Debt – Taxpayers who have negotiated with their credit card companies to lower their balances may actually be creating a situation where they owe taxes. Let’s say you negotiated your $20,000 balance in credit card debt down to $4,000. That’s the same as if someone gave you a $16,000 gift – and that $16,000 is reportable income.
This is likely to end up with surprise tax bills which taxpayer did not put money aside for. This “forgiveness of debt” is not the same if you declare bankruptcy. This is an important fact to consider when deciding to file bankruptcy or trying to work out deals with credit card companies.
2. Getting Paid in Cash? – Cash payment often present the question of whether or not to declare them. It’s not worth the risk and that there are other consequences. There is a temptation not to report cash payments, but the trail you are leaving the IRS may be more obvious than you think. Then what happens when you need to support your income in order to get a loan? The days of no-doc loans are over and will never be coming back.
3. Under-Withholding – In an effort to boost the economy, President Obama authorized the IRS to reduce the amount of withholding required, but there are problems with that. In early returns that have already been filed for 2009, we have already seen that many people have under-withheld. This is especially true of people who took a second job to make ends meet. That could mean that those taxpayers – many of whom are expecting a refund – will be rudely met with a tax bill on April 15th.
4. Over-claiming dependents – Boomerang children may not be considered to be dependents for income tax purposes. Just because your adult children have moved back in with you due to loss of a job does not automatically mean you can claim them as dependents. Be sure to check that you are paying for more than 50 percent of their support. Also, make sure no one else is claiming them as dependents.
5. Leaving money off the table – Don’t let the fear of an audit keep you from taking legitimate deductions. Even in this poor economy, many folks are still deathly afraid of an audit, so they refuse to take legitimate deductions, thinking that will curry favor.The fact is auditors assume noncompliance.
If you were chosen for an audit that may very well be the case. But, as long as your books are in order and you hire a tax attorney or CPA to represent you the second you get that first notice from the IRS, an audit really doesn't have to be all that bad. They become the go-between between you and the IRS so you don't have to deal directly with them!
6. Part of unemployment compensation is taxable — Collecting unemployment benefits often causes problems with under-withholding, so don’t fall into this trap.
7. Early withdrawal on IRAs – If circumstances have caused you to withdraw from your IRA early, you can expect penalties. While we have seen withdrawals reduced over the past year, this issue is ongoing, and more people will likely be put in a corner facing an IRS with incredible collection powers if they don’t pay attention to this.
8. Temptation to Use Disreputable Preparer – We strongly advise using a reputable tax preparer. Don’t fall victim to a preparer's promise of a refund that sounds too good to be true. This can be very tempting when you are desperate for cash, but it’s not worth it. This type of preparer should be avoided at all costs. By using their services, you will create a bigger headache for yourself than you ever could have imagined.
9. Self Serving “Mistakes” – If you do your own taxes and you realize you are going to owe money (because of under-withholding rule changes mentioned above) resist the urge to “fudge” on your returns to make it look like you are due a refund. This is not a good idea. The IRS will eventually figure it out, and then will come at you with full force.
10. Self-employed individuals making inadequate estimated payments – As the economy makes it more difficult for self-employed business owners, they may very well be tempted to make inadequate estimated payments on their taxes. When your bottom line is squeezed, there is a temptation to pay the IRS last, if at all. We certainly understand this – most people will pay for groceries or a mortgage payment before they pay the IRS.
But, if you do not pay the IRS on time or do not keep current with those payments, the IRS will levy all your bank accounts to $0; and send levies to your accounts receivable so that you do not see a dime.
11. Employers Failing to Send in Payroll Tax Deposits — In a down economy, many employers will stop sending in payroll tax deposits while they are waiting for slow receivables. This is a dangerous game. A better idea is to get a loan against receivables, or, even as difficult as it may be emotionally, to start laying off employees. Layoffs may be temporary, but failing to make tax deposits may create a hole that an employer may never be able to dig out of.
The IRS is perhaps the most powerful collection agency in the world and can levy bank accounts and garnish wages — all without a court order. This year, many taxpayers will find just how powerful the IRS is first-hand. Follow these tips and hopefully you will be one of the lucky ones who will never have to worry about running into a tax nightmare.
About IRS Medic
IRS Medic is a practice of tax attorneys that works to resolve tax issues for businesses and individuals. These issues can range from unfiled taxes to audits, liens, penalties, and other IRS actions. Attorney Anthony Parent and his father founded the firm in 2003 to help clients deal with difficult tax problems. He combined an academic background in finance with a law degree to develop the foundations of the practice. For more information, call or email us: 888-727-8796 or firstname.lastname@example.org.