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Tuesday, January 17, 2012

Best Ways to Handle IRS Tax Problems

When you discover you have tax problems with your IRS taxes, the natural instinct many people have is to avoid the problem. For those people this means avoidance of filing those taxes because they believe (or hope) those taxes will just go away. Of course, most people realize that isn't going to happen, but they also lack the knowledge concerning their options for eliminating the problem other than working out a monthly payment arrangements with the IRS. If they are unable to afford those payments this possibility isn't even an option.
Most people don't deliberately attempt to avoid paying IRS taxes to avoid the tax problems; they usually end up owing excess taxes because their employers fail to deduct enough money for taxes during the year. This can happen for several different reasons:
  • People may claim too many deductions during the year in order to have more money in their paycheck. They do not think about the potential harm this may cause when it is time for them to file their taxes the following April. This method is acceptable for those who may be suffering a short-term income loss but should never be used as a long-term solution for income reduction.
  • Working for more than one employer can also cause tax problems because the tax tables always assume the employee works for only one employer.
  • Receipt of 1099 income such as subcontracting work for which you are held responsible for payment of taxes.
  • Receipt of alimony is taxable income for the recipient
  • If you move from an apartment to a house—or even pay off your house—you lose deductions such as mortgage interest (though remaining in the home still gives you the deduction for real estate taxes and insurance)
  • Operating a home-based business with 1099-based income generation
There may be other reasons a person may end up with an underpayment of taxes or huge tax bill, but the above constitute the most common ones. Once you realize you have problems with IRS taxes, contact them to work out a payment plan with the IS or a third party agency. If you are unable to pay everything you owe begin working on a plan for an Offer in Compromise. You want to keep in mind that not everyone qualifies for an Offer in Compromise. The decision is up to the IRS and will depend on your financial ability to repay the debt during your lifetime. This means it will be a great benefit for those who are older and have minimal future earning capacity.
For a taxpayer whose IRS taxes only involve one tax year, it is probably just as easy to allow the interest to build up and use the refund from the following year to pay off the debt. This may not be the best solution for tax problems in all cases, but it is a possibility for those taxpayers who see an improvement in their financial position by the following tax year. If you make payments during the year you will reduce the debt farther and reduce the amount of interest the IRS charges on the unpaid balance. They will retain your tax refund for any taxes you owe, and you can go into tax court to request removal of penalties and interest if your circumstance justify it.

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