As April 15 approaches, many people dread the mere thought of doing their taxes - not to mention all the paperwork and the possibility of an audit. Fortunately, you can prevent these annoying situations from getting under your skin. Here we'll take you through some frustrating tax scenarios and what you can do to keep them from happening to you.
In Pictures: Top 10 Solutions For A Big Tax Bill
1. A Surprise Visit From the IRS
In some cases, the IRS will arrive at your home or workplace to discuss your tax bill. This usually happens if there is reason to suspect you've been dodging your taxes. In a case that made national news recently, the IRS sent two agents to confront a California car wash owner who hadn't paid his tax bill in four years. The amount in question? Four cents.
While that's an extreme example, don't be surprised if the IRS pays you a visit if they haven't heard from you in a while.
"This may occur if you are missing many returns, have a history of taking suspicious tax positions or if you owe the IRS a substantial sum of money," says Roni Deutch, a.k.a "The Tax Lady", a tax attorney and CEO/founder of the Roni Deutch Tax Center. (Find out what to do if you get audited in Surviving The IRS Audit.)
2. Debt Forgiveness - At a Price
If you have a debt that's been forgiven or canceled, you may still need to pay taxes on that forgiven amount. Your creditors must send you a form 1099-C, with the forgiven debt listed as income. Forgiven debt related to a principal residence is excluded by the IRS (up to $2 million) - but not by all states. The Silicon Valley Mercury News recently reported the story of a man who faces a tax bill for nearly $400,000 in forgiven mortgage debt. If you have a large debt that a creditor may forgive, you may need to consider whether you qualify as insolvent (or whether bankruptcy might be an appropriate strategy). The federal government doesn't collect if you were insolvent at the time the debt was forgiven, or if the debt was discharged through a bankruptcy. (To learn more, see No Debt Forgiveness For The Tax Man.)
3. Intimidation and Identity Theft
Tax-related identity theft has been on the rise, and the IRS has issued several recent warnings about these risks. To keep your information safe, use caution when divulging your personal/financial details to anyone, especially online.
"Be suspicious of any calls or e-mails purporting to be from the IRS, no matter what the issue," says Erin Dendinger on behalf of Intersections, a provider of identity risk management services. "For example, some scams claim that someone else has already filed tax returns in your name."
There are also lots of "phishing" emails that claim to be from the IRS – and will often include threats of audits or other consequences, just to scare recipients into a quick response. Don't be fooled: as Dendinger says, the IRS generally sends information by mail, will rarely call and will never email.
4. Custody Battles
As if the divorce wasn't bad enough, you could find yourself facing tax headaches long after your marriage is history. Each parent filing the kids as dependents is one of those slip-ups that happens fairly often with ex-spouses, and it can cause both parties lots of aggravation. If your ex files first, he or she will get the credit – and if you unknowingly claim credit too, you're the one the IRS will come looking for.
"The rule is that whoever files first will initially get the credit," says Steven Meyerson, a 30-year CPA and tax expert on JustAnswer.com. "If it's not the correct person, correspondence with the IRS will be required by both parties to resolve the matter."
The solution is simple: make sure you and your ex are clear on who is claiming the kids. (For more on divorce and tax issues, see Taxing Times For Divorced Parents.)
5. eFiled Errors
If you've discovered that you electronically filed a return with an error, you might be tempted to waste endless hours searching for an online fix. Here's a shortcut: There isn't one.
"If you've e-filed your return but have to make a change, you must do it manually (on paper) by mail," Myerson said. "Currently, the IRS does not accept tax amendments via electronic submissions, so don't spend time trying to figure out how to do so."
6. Horrible Hold Music
If you've ever spent some time on hold with the IRS, you've probably been subjected to some pretty lame music. OK, so this may not be the worst tax nightmare, but the experience can be acutely painful for those who don't enjoy classical music.
"If you have ever called the IRS, you know they love their classical music," says Deutch. "You probably also know that they seem to have a very limited collection, because the same songs seem to rotate over and over again. Because of the IRS wait times, you will probably know these by heart."
The best you can do to avoid this is try to get your taxes done early - that way, if you need to contact the IRS you won't need to compete with other filers' last-minute questions. You might also try calling at the very beginning or end of the IRS's calling hours (7am to 10pm local time).
You may never look forward to filing your taxes, but there are some steps you can take to make things run more smoothly. It might take a little extra effort, but once you've filed you can feel confident that the IRS won't come calling again until next April.
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