6 top tax problems — and how to solve them

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Although taxes by nature can be complicated, most taxpayer problems center on just a few main areas. The tax experts at Jackson Hewitt analyzed data from the annually published IRS Data Book and determined that there are six main tax problems that Americans face.

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These problem areas are listed below, along with ways that you can resolve or avoid them.

Penalties

According to the IRS Data Book, IRS penalties are by far the most commonly encountered tax problem, affecting 29.5 million Americans annually. While there are over 150 different types of IRS penalties, the most common penalty is “failure to pay.” All in all, failure to pay, estimated taxes and failure to file penalties amount to 96% of all penalties for individuals.

The obvious way to avoid these most-common penalties is to file your taxes in a timely fashion, stay current with your estimated taxes and pay the taxes that you owe. Remember that even if you don’t have the money to pay your taxes right away, you still have options.

For example, each taxpayer is granted an automatic six-month extension if they need it — although you still have to pay the taxes you owe by tax-filing date, typically April 15. If you don’t have the money to pay your taxes, contact the IRS about a payment plan.

Unpaid Taxes

Over 20 million Americans owed tax and couldn’t pay in 2019, with over $539 billion owed to the U.S. Treasury. IRS agents were actively pursuing 11.2 million delinquent accounts. If you find yourself in this situation, don’t panic. As there are millions of other Americans in the same boat, the IRS tries to make it as easy as possible for you to pay what you owe in the form of an installment agreement. In fact, over 90% of taxpayers who owe unpaid taxes end up on an installment agreement.

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One of the biggest advantages of setting up a payment plan with the IRS is that it legally blocks the agency from pursuing collection activities, including levying your property. You can apply for a short-term payment plan online if you owe less than $100,000 in combined taxes, penalties and interest and can pay what you owe in 180 days or less. For a long-term installment plan, that limit drops to $50,000.

Non-Filing

According to the IRS Data Book, more than 10 million individuals simply did not file their tax return, along with more than 50 million businesses. The IRS can usually identify non-filers by tracking W2s and/or 1099s, which are sent both to taxpayers and to the IRS directly.

Even if you can’t pay the IRS what you owe, you must file a tax return in a timely fashion. The penalty for failing to file is 5% of what you owe for every month or portion of a month that your tax return is late, up to a maximum of 25%. So, if you owe $10,000 in taxes, for example, you may owe as much as $2,500 in failure to file penalties.

If you’re already struggling to pay your taxes, boosting your tax bill by an additional 5% to 25% isn’t a sound strategy. File your return and deal directly with the IRS to work out some type of financial arrangement so you can at least avoid the failure to file penalty.

Underreported Income

Whether by accident or intentionally, a significant number of Americans don’t report all of their W2 and 1099 income to the IRS. This is a relatively easy error for the IRS to catch, as it receives its own copies of all W2s and 1099s. Data from the IRS indicates that a whopping 27 million taxpayers don’t report all of their income, out of a total of 150 million filers. The average amount owed and not reported is $3,336.

While there are plenty of legal ways to reduce your tax bill, underreporting your income isn’t one of them. The IRS can slap you with a penalty of 20% of the amount of income you didn’t report if it finds you acted out of negligence or if you disregarded the rules or regulations. Interest can also be applied to your penalty.

Math Errors

Math errors on tax returns are fairly common, with the most common mistake being incorrect tax calculation. The good news is that the IRS usually catches math returns and automatically corrects them for taxpayers, sending out a notice of the action taken. If you agree with the new IRS calculations, you can simply accept their findings. If not, you have the right to contest them.

Of course, the simplest way to avoid this tax problem in the first place is to ensure that your return is correct when you submit it. Typically, math errors only appear on returns that are filed by hand and on paper. If you use any of the multitude of tax software programs that are available, you won’t likely encounter any math errors on your return.

Audits

No taxpayer wants to be audited, and for good reason. The IRS changes an astounding 89% of returns that it audits, and the changes usually amount to taxpayers owing a significant amount of money. For audits by mail — which amount to 74% of all audits — the average amount owed is $6,164. But for the more serious field audit, the average amount owed jumps to a whopping $68,122, according to IRS data.

While audits can’t always be avoided, the best way to stay out of trouble is to file an accurate return. In that way, even if you are audited, you should be able to defend yourself and perhaps pay no additional tax at all. If you draw attention to your return by taking outsized deductions or credits, your chance of being audited increases.

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