Receiving notification from the Internal Revenue Service that there’s some kind of problem is one of the most bone-chilling situations an American taxpayer can experience. Just receiving an envelope with a return address from the IRS can strike fear. There are many different reasons that the IRS might reach out, but some are more common than others.
Here are the top issues that would cause a taxpayer to hear from the IRS or require you to resolve an issue:
An Error On Your Tax Return
Nobody’s perfect, and filling out tax returns is not an easy thing. If you’ve made a mistake, whether it’s something simple like filing status or number of dependents or something bigger like total income or incorrectly claiming a deduction, if you discover it on your own, all you need to do is file an amended return using form 1040X, the Amended Individual Income Tax Return. If the mistake means that you owe more money, quickly submitting the amount that you owe will help you avoid having to pay too much in penalties or interest. It’s not at all unusual for the IRS to discover mistakes—especially math mistakes—and they will generally notify you that they have made corrections on your behalf.
Along the lines of the mistakes referenced above, there is a specific form that the IRS will send you if they determine that the amount of income you report on your tax return is different from what has been reported by employers. That form is the CP2000 Notice, and the agency will send it to you, notifying you of the corrected amount, should they review your return and feel that it is appropriate
Failure to File a Tax Return
Filing a tax return isn’t necessarily required if you don’t owe money or if you’re owed a tax refund, but it’s not a good idea. Failing to file a return when you’re owed a refund puts you at risk of losing out on receiving the money you’ve owed—you have just three years to amend the problem if you want to get your money. For those who are in arrears to the IRS, there is a significant negative outcome to failing to file a return, including having to pay a “failure to file” penalty that can go as high as 25 percent of your unpaid tax bill: 5 percent of the amount you owe, plus interest, will be charged for each month for up to five months
You Owe the IRS for Taxes Not Paid
When the IRS calculates that you have not paid them the full amount that you owe, they will send you notification of what they believe the difference is via form CP14.
You Owe the IRS Penalties and Fees
When you don’t pay your taxes or you fail to file a return, the IRS will notify you that you owe them penalties, and possibly interest.
You Owe the IRS But Can’t Afford to Pay
There are many taxpayers who find themselves facing a tax bill that they are simply unable to pay all at once. If you fall into this category, the IRS does offer the option of paying in installments. To request this type of payment plan, contact the agency. If even paying in small increments is outside of your ability, you may be able to negotiate a reduced tax bill through what is called an Offer in Compromise.
Tax Debt Resulting in Tax Levy
If you are unable or unwilling to satisfy your tax debt, the IRS may opt for a tax levy, which is the legal seizure of your property in lieu of payment. A tax levy can take the form of real property such as real estate, your vehicle or personal property, or your wages, the money in your bank accounts or your financial accounts. Notification that a levy is being issued against you comes via either notice LT11, CP504, CP90, or CP91.
Notification that A Tax Lien Has Been Filed
If you have failed to pay your tax debt, the IRS may take action to protect its own interests ahead of other creditors by filing a tax lien. This comes in the form of Letter 3172, which will be sent to both you and your other creditors to let them know of the government’s claim against your financial assets, personal property and real estate. By sending this letter out, the government ensures that it will benefit from the liquidation of any of your property in order to satisfy the amount that it is owed. Once a lien has been placed on your property, it is extremely difficult to get out of until you’ve paid up.