6 IRS tax debt mistakes to avoid this tax season
Tax season brings with it a unique type of stress. Between gathering your tax documents, calculating the deductions you qualify for and meeting filing deadlines, it's easy to make mistakes that could lead to tax debt problems with the Internal Revenue Service (IRS). And, while some tax-related errors might seem minor at first, the reality is that they can quickly snowball into significant financial burdens over time.
Part of the issue is that owing money to the IRS can eventually trigger penalties, interest and even more serious consequences like liens or levies against your property. What makes matters worse is that many of these situations arise from simple, avoidable mistakes that occur during the filing process. All it takes is a missed deadline, a misreported income figure or an overlooked deduction to end up with hefty fines or an unexpected audit.
The good news is that many of these issues are completely avoidable with a little preparation and attention to detail. Below, we'lle examine what those mistakes are and how to avoid them this tax season.
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6 IRS tax debt mistakes to avoid this tax season
As you navigate tax season this year, be sure to avoid these critical IRS tax debt mistakes:
Filing late or not filing at all
One of the biggest mistakes you can make is missing the tax filing deadline or, worse, not filing at all. The IRS imposes both failure-to-file and failure-to-pay penalties, which can quickly compound into significant debt. Filing on time is crucial to minimize additional penalties, even if you cannot pay your full tax bill.
If you're struggling to meet the deadline, consider filing for an extension, which gives you extra time to submit your return. Note, though, that an extension only delays your filing deadline — not your payment deadline. If you owe money, you should still estimate and pay as much as possible by the original due date to reduce the interest charges.
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Underreporting your income
Failing to report all sources of income can lead to serious consequences, including penalties, interest and potential audits. The IRS receives income reports from employers, banks and other institutions, meaning they can cross-check your reported earnings. If you forget to include freelance work, investment gains or gig economy earnings, you could be flagged for underreporting.
To avoid this mistake, carefully review all W-2s, 1099s and other income statements before filing. Keeping detailed records of all income sources throughout the year will help you avoid misreporting and ensure an accurate return.
Claiming ineligible deductions or credits
Tax deductions and credits can be a great way to lower your tax bill, but claiming deductions or credits you don't qualify for can lead to audits, penalties or repayment demands from the IRS. Before claiming a deduction or credit, ensure you meet all the eligibility criteria. Keep receipts and documentation for any deductions in case you need to substantiate them later.
If you're unsure whether you qualify for a particular tax break, consulting a tax professional can save you from potential legal and financial trouble. Or, if you've claimed something incorrectly, file an amended return before the IRS contacts you about the issue.
Ignoring IRS notices
Many people assume that IRS notices are automatically bad news and choose to ignore them. However, doing so can escalate problems quickly, leading to increased penalties, interest and even collection actions like wage garnishment or tax liens. Addressing IRS concerns promptly, though, can prevent minor issues from turning into major financial headaches.
If you receive a letter from the IRS, open it immediately and determine what action is required. Sometimes, a simple correction or clarification is needed to resolve the issue. If you don't understand the notice or disagree with it, seek help from a tax professional.
Not setting up a payment plan when you can't pay in full
Many taxpayers mistakenly assume that if they can't pay their full tax bill, they have no options. In reality, the IRS offers installment agreements that allow you to pay off your balance over time. Setting up a payment plan can prevent more severe collection actions like wage garnishment or bank levies, so it makes sense to do that if you're unable to pay your full bill immediately. If you're struggling to pay, reach out to the IRS or a tax professional to explore your options before penalties and interest accumulate further.
Relying on bad tax advice
If a tax-saving strategy sounds too good to be true, it probably is. But bad tax advice is everywhere, and following incorrect or outdated tax strategies can lead to costly mistakes, audits and even legal trouble. So, avoid relying on generic tax software alone. While helpful, software programs may not catch every nuance of your specific financial situation. You should verify tax information with reputable sources such as the IRS website, certified tax professionals or licensed accountants instead. And, when in doubt, seek professional guidance to ensure you're making informed decisions.
The bottom line
Taxes can be complicated, but avoiding these common mistakes can save you money, time and frustration. By staying organized, filing on time and seeking professional guidance when needed, you can prevent IRS tax debt from becoming a serious financial burden. If you do find yourself in trouble with the IRS, don't ignore it — reach out for help and explore your options for resolution instead.
