Common Tax Resolution Mistakes People Make
After spending years in the industry, we’re pretty sure that no one enjoys doing taxes, which probably explains why so many of us leave it to the last possible moment. However, at the same time, everyone is worried about messing up their taxes.
We understand that organizing all of your information and double checking your returns to make sure that they are complete and accurate isn’t an easy task to do yourself. It becomes all the more difficult if you do not have professional help and more so if you have let procrastination get the better of you during the year. While tax preparation software is preventing more taxpayers from making mistakes on their annual tax returns, there are still many mistakes that clients routinely make.
To help create awareness about these errors and help people avoid making them, Tuttle & Tuttle, CPA has compiled a list of the most common tax resolution mistakes people make.
1. Not opening the mail from the IRS or FTB.
Many of our clients get letters from the Internal Revenue Service (IRS) or the California Franchise Tax Board (FTB). They either do not open the letters or just put them aside and hope that they will just go away. Eventually, something drastic happens, and their bank account gets levied, or their wages get garnished.
The IRS is now sending letters that delinquent taxpayers might be denied a passport or use of their passport. Also included in this area is not responding to an IRS audit which will result in the auditor making adjustments that are very damaging to you for many years to come. All of these awful outcomes could have been avoided if they opened their letters and contacted us right away to help them resolve their tax problems.
2. Claiming too many exemptions or not making estimated tax payments.
Many of our clients try to make their budget balance by claiming too many exemptions on their wages, so little or no taxes are withheld. Then when it is time to file their tax returns they either don’t file because they know they have cut corners on withholding or they owe huge amounts of tax or penalties for underpayment and interest. Often they are amazed at the actual amount they owe. Having incorrect withholding is very expensive and causes considerable problems in the long run. This also happens when someone who is self-employed doesn’t make their estimated tax payments.
3. Not paying payroll taxes or filing payroll reports for your employees.
Often when a business is struggling financially, the first thing that doesn't get paid are the payroll taxes. Then the payroll reports do not get filed. This is a sure way for a business to eventually fail because the penalties and interest will eat up future profits. Also, the stress is overwhelming when you are behind on payroll taxes because both the Employment Development Department (EDD) and the IRS are very aggressive when collecting this type of tax debt. If you find yourself in this position, it is essential to get professional help right away and take whatever steps necessary to pay your payroll taxes on time. This problem can be solved but the longer you wait to meet with a tax resolution professional the harder it will be down the road.
4. Preparing an offer in compromise without professional help.
Many times an overworked IRS Revenue Officer, in the hopes of getting the case out of their caseload, will ask a taxpayer “Why don’t you file an Offer in Compromise?” This gives the taxpayer the belief that they must qualify for an Offer or the Revenue Officer wouldn’t have suggested it. Unfortunately, there are many, many items to consider when preparing an Offer in Compromise and analyzing whether this is the best course of action. A poorly prepared Offer will be rejected adding months to the IRS collection statute. During this time interest is accruing and the debt is increasing.
Preparation of an Offer in Compromise is not a do-it-yourself (DIY) project. You need professional guidance to see if you genuinely qualify and then professional preparation and follow-up once the OIC specialist analyzes it. You may even need to have a professional file an appeal if your Offer is rejected.
5. Not taking into account things that are taxable events.
So many times our clients come to us after taking withdrawals from their retirement accounts without knowing the tax consequences. Most of these actions are taxable, and you need to get advice before you withdraw money from your IRA, 401(k) or pension. The companies issuing the checks don’t know California taxation rates and do not know your overall tax picture.
Other taxable events that get overlooked are the selling of assets such as stocks or rental properties. Sometimes home sales can generate taxable income as well. Get advice beforehand, so you have the money set aside for the taxes.
6. Misunderstanding whether or not your business is really making a profit.
Too many of our clients work very hard but are continually unable to make estimated tax payments on their personal income or pay their payroll taxes. Often they do not have anyone doing their bookkeeping, or if they do, they do not look at the bookkeeping because they don’t really understand what it means. Our job is to figure out what is going wrong, offer suggestions, and explain what the Profit and Loss and Balance Sheet mean and why they are essential.
While there are many more mistakes that can be made in operating a business that may cause tax liabilities to occur, these six are the most common ones we see. To help you avoid them and get the best accounting services, reach out to Tuttle & Tuttle, CPA. As experienced Certified Public Accountant in Fresno, CA, we work with taxpayers having trouble resolving their tax problems and offer individualized service. We know exactly how to tackle delinquent taxes and help get you to a safe place free from wage garnishments, bank levies, and other aggressive collection action.