Getting in trouble with the IRS is on most people’s top nightmares of all-time list. It doesn’t matter if you are on the most scenic getaway of your life, news from the IRS is enough to ruin anyone’s day. I am not immune to it either. Even unopened, a letter from the IRS can send any of us over the edge. There is reason to be worried, but there are also resources to help deal with almost any situation.
Do Not Panic
The IRS will contact you by mail for a variety of reasons. While I completely sympathize with the fear around receiving a letter from the IRS, sometimes there is no reason to worry at all. This is the case for IRS Notice 797 for example, which actually notifies you that you may be eligible for a refund. Other notices are quite common, like IRS CP2000 notices, which are distributed to millions each year. If the IRS finds a discrepancy between your income information and your tax return, you will receive this CP2000 notice. I will repeat what I said before: do not panic, but educate yourself and be proactive.
Identify the Problem
Bite the bullet. Procrastination will only increase your stress levels. I would suggest that you begin by determining what seems to be the problem. It could be paying a sum you owe to the IRS in back taxes, but it could also be as simple as needing to complete missing information. The procedure can be as straightforward as opening the letter or notice you’ve received from the IRS.
Decide whether you agree with the information, statement, or amount you are requested to pay if this applies. You can do so by comparing your own copy of your tax return with what is presented in the letter that the IRS has sent you. Note that all your dealings with the IRS are time-sensitive, as interest is added to penalties immediately. The two cardinal sins a taxpayer can commit are filing taxes late and not paying enough.
Follow the IRS instructions
Taxes can get confusing for anyone, especially people whose income does not stem from a salary. The self-employed taxpayers who live off passive income or other investments are prone to penalties, only because they are not operating in the more rudimentary withholdings model of tax payment.
Whatever your payment plan with the IRS, time is of the essence. This rule is true of most tax organizations across the world, so it should not come as a surprise that timeliness matters so much for the IRS.
Appeal a Claim
The IRS offers penalty waivers to those who qualify. Depending on what notice you have been dispatched, you should be able to submit a claim for a refund. I would triple check that I am correct in my claim before disputing the IRS.
If you cannot afford the amount the IRS is requiring you to pay, you can argue that paying your debt would put you in financial hardship. Note that waivers are not lifelong sentences. If you should become financially viable, you will be asked to pay the dues that have accrued over the tax period you were exempt from paying.
Another way to avoid paying a penalty is the first-time abatement penalty waiver (FTA). Different rules apply, and as I said you want to exercise due diligence, but it is fair game to try if it is indeed your first time making a mistake with the IRS.
Hire a Professional
To amend a return, submit Form 1040X, also known as the Amended U.S. Individual Income Tax Return. This must be done on paper, not electronically. I would say that if you can fix your problem at the source, you will be in better shape than if you have to argue with what the IRS has taken issue with.
I would highly encourage anyone dealing with tax trouble to seek professional guidance, especially if the IRS decides to audit you. While the IRS rarely pursues for criminal action or fraud, it is always advisable to get ahead of any such charge. The more likely outcome of any engagement with the IRS will be paying up. You can owe up to 75% of the taxes you owe in civil penalties.