Four Common Reasons People Get In Trouble With The IRS

There are several different reasons why people get in trouble with the IRS.  A small error can wind up snowballing into one big mess.  Over the last few years, the IRS has stepped up its examination of taxpayer records.  I personally believe the improved sophistication of technology is a primary reason for the increase in IRS intrusion.  Nevertheless, we the people may not have the resources to fight the government, so we give in to their demands.

The perfect strategy would be to start out on the offensive by making sure you take the necessary steps to stay off their raider.

Here are four common reasons people get into trouble with the IRS:

Filing too many exemptions

Exemptions, taken correctly, can drastically lower your taxable income.  As such, some people cannot resist helping themselves to more exemptions than they are legally entitled too.

Legally, you have a right to claim an exemption for yourself, a spouse, if you file married filing jointly, and all your dependents provided they meet the IRS dependency guidelines.  For tax year 2016, the personal exemption amount is $4,050, up from $4,000 in 2015.  So you see how one could be tempted to throw in 2 or 3 additional exemptions as a way to lower their tax liability.

Taking early withdrawals from your retirement plan

Some individuals are unaware that taking an early withdrawal from their 401(k) or IRA can trigger an additional tax bill.  This bill can be quite large depending on the total amount withdrawn.  In addition to paying taxes on the withdrawal based on your normal tax rate, you will also be required to pay an additional 10% early withdrawal penalty.

An early withdrawal is determined by your age at the time you make the withdrawal.  If you make the withdrawal before you turn 59 ½ you will be liable for the additional 10% penalty.  There are some exceptions to this rule which I will not be covering in this post.

Not paying enough taxes when self-employed

This one is huge for solopreneurs.  Many people who own their own business do not pay their taxes on a quarterly basis.  By law, self-employed individuals are required to remit income and self-employment tax to the IRS and state on a quarterly basis.

A significant number of people do not abide by this requirement and end up with an unmanageable tax bill at year-end that they cannot pay.  Cash flow is one of the main obstacles that self-employed individuals experience.  It seems as if every dime that comes in the door finds its way back out before it has had time to get comfortable.

Implementing a monthly budget that includes funds to cover your tax bill at the end of each quarter is a good idea.  It is much easier to come up with the money every quarter to pay your tax liability than it is to come up with the entire amount at year-end.

One way to make sure you have enough funds to cover your business expenses, including your tax bill, is to pay particular attention to your company’s cash flow.  Make sure that you schedule bill payments around the time you expect to receive service or product revenue.

Accumulating a large tax bill at the end of every year will only end up with you owing the IRS more than you would like after a few years of repeating the same behavior.

Not paying taxes on lottery or gambling winnings

Any type of gambling, whether horse racing, casino gambling, playing the lottery, and even betting on sports, is considered income, and must, therefore, be reported on your tax return.  Not doing so can cause problems later down the road.

Stay on the offensive so you can defend yourself against the IRS if the need ever arises.

Have a great week!!!

Desarie Anderson, CPA, EA

Anderson Accounting, LLC

(404) 300-3175

desarie@andersonaccounting3.com

 

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