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Five Keys To Avoiding IRS Tax Debt

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By Edited Nov 13, 2013 1 0

Stay compliant with the IRS and secure your financial future.

IRS tax debt can sneak up on individuals no matter what their income level or location.  It causes financial hardship and can be very difficult to deal with once an individual is delinquent.  Taking these precautionary steps can help to ensure that you never have to deal with any serious tax problems.

1. Pay Your Taxes In Full And On Time

Failure to pay penalties with the IRS add up if taxpayers fail to handle the situation appropriately. The failure to pay penalty is .05% of the total tax liability per month. Over time and with interest, this amount can add up.  The maximum penalty for failing to pay your taxes tops off at 25% of the total taxes owed.  For most individuals, that is a very large sum of money being added to an already difficult amount of taxes owed.

Failing to File your income tax returns will lead to hefty fines and possible jail time.  If the IRS decides that you failed to file your federal income taxes, they will press criminal charges of tax evasion or tax fraud.  There is a monthly penalty of 5% for taxpayers who fail to file their income taxes, and the maximum penalty is 25%. 

Both failing to file and failing to pay income taxes will cause the IRS to start adding penalties and interest to the total taxes due.  The good news for some taxpayers, is that the IRS does not penalize taxpayers who are owed refunds.  In fact, the IRS encourages those individuals who did not file their tax returns to do so even if they have missed the tax filing deadline.  Taxpayers have a maximum of three years to file their tax returns and get a refund from the IRS.  After that amount of time, the Statute of Limitations expires and the IRS does not have to issue a tax refund.

2. Hire a Tax Professional

Just because everyone must file and pay their taxes does not mean that it is an easy task.  Even the IRS commissioner uses a tax preparer because the IRS tax code is too difficult to understand.  Hiring a tax professional will help you to be sure that your tax returns are filed accurately and efficiently. 

A good tax preparer will have a few things that you should look for:

  • A PTIN, or Preparer Tax Identification Number – The IRS has started requiring these for tax preparers as a way to combat tax identity theft.
  • References – A professional in any profession should have a list of clients that you can call up at any time to use as a reference.  You want to ensure that his or her clients were satisfied with the services.
  • Experience – Be sure that you do not trust your income taxes with someone who has started a business as a hobby.  The IRS tax code changes frequently and only tax professionals who have experience should be trusted to accurately file your income tax returns.

3. Save All Paperwork And Tax Returns For At Least Three Years

Your tax documents are very important.  If the IRS audits you, those documents become even more important.  And not just your tax documents, any receipts and financial documentation, whether they be healthcare bills or loan applications, are very important to ensuring an IRS audit will go smoothly.  This is why it is important to take the necessary time each year after tax season to file and back-up your tax documents.

Taxpayers who keep their financial and tax documents in a secure location have a much easier time filing their income taxes every year.  In addition, backing all financial documentation up digitally is a must.  Storing important documents on DVDs or hard drives that are locked in safe-deposit box at the bank will make sure that no natural disaster or destructive force (like a fire) permanently destroys sensitive documents.

Unless a taxpayer can prove the deductions and credits that they took on their income tax returns, the IRS will penalize and fine taxpayers who cannot bring forth documentation during an audit.  The IRS will also automatically adjust income tax returns, which will increase the tax bill and cause tax debt problems.

4. Appeal Any Tax Disputes With The IRS

The Appeals office of the IRS is separate from any other part of the administration.  They are there to ensure that the IRS’s determination was correct and look into the claims of the taxpayer who is disputing (or appealing) the decision.  Filing an appeal will give you the opportunity to dispute an IRS decision or disagree with an agreement sent to you. 

Appeals are made when the IRS is trying to take inappropriate collection actions against a taxpayer, the IRS did not properly apply the law because they were missing information or the IRS made a mistake due to a misinterpretation of the law.  Taxpayers should not appeal when they believe they cannot pay their IRS tax debt, or they received a bill that has no mention of Appeals.  In certain cases, Appealing an IRS decision can save an individual thousands of dollars and gives the IRS a face, during conferences between the taxpayer and the IRS assessor. 

And if worse comes to worse…

5. Setup Up An Installment Agreement To Pay Your Owed Taxes

The best way to get rid of tax debt is to handle it immediately. The IRS has implemented a few rule changes recently that are helping more taxpayers who are struggling in the down economy.  Individuals who find they suddenly owe tax debt they are not able to pay in one lump sum can enter into an automatic Installment Agreement with the IRS that will stop collection actions by the government. 

An Installment Agreement is a negotiated tax settlement between the IRS and taxpayer that allows an individual to pay the full tax liability back to the government over the course of months.  Full payment must be made within a six year time frame.  Taxpayers wishing to take advantage of this automatic Installment Agreement tax resolution must owed taxes less than $50,000.  They must also be able to make direct debit payments to the IRS. 

Businesses can also take advantage of Streamlined Installment Agreements if their tax debt is less than $50,000 and they can settle the debt within two years.  Businesses must also use direct debit if their tax debt is between $10,000 and $25,000. 

IRS Tax Help
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