People fear and dread the Internal Revenue Service. Legends (and some are true) abound about what the IRS can do to you – including impounding your money and your stuff and throwing you in jail. Yes, the IRS has a lot of power to make your life miserable, but in my nearly 30 years of experience working with taxpayers and the IRS, I have found it rare for the IRS to mess up someone’s life without provocation.
Here is a very short list of ways to provoke the IRS:
• Fail to file a tax return. Sometimes you actually do not need to file – if your income is very low and you have no sales of assets like stocks or real estate during the year. If you do not need to file, then do not file. You may hear from the IRS, but you can simply check a box on the form they send you to indicate that you did not need to file. Now – you may WANT to file even if you do not have to do so. Why? By filing, you will avoid correspondence with IRS. You may also need a tax return to show a lender or creditor that you did indeed file in a given year. However, if you need to file a tax return – do it. Use software. Pick a tax pro. But do it. On time (either by April 15 or under extension by October 15—it is easy to file an extension but it must be filed by April 15).
• Fail to open letters from the IRS. This one is stunning to me. I cannot tell you how many times I have discovered unopened letters from IRS in a client’s stack of tax documents. Why didn’t you open this? I ask incredulously. And the answer is usually, I was afraid of what it said. Good grief. We are all adults. You cannot hide your head in the sand. Open the letter. Read it. You cannot resolve a problem that remains hidden in an envelope. And just because it is hidden doesn’t mean it will go away. Instead, it is festering in that envelope. If you need help, call your CPA or even the IRS. The IRS truly does not want to brutalize you. They simply want to solve a problem and you are the key.
• Fail to respond to IRS correspondence in a timely and professional manner. Often letters simply ask for help understanding something you either did or did not do on your tax return. The most common are simple mistakes like transposing a Social Security number or not accurately reporting the amount that you paid in estimated taxes. If the request is easy, just do it and get it over with. If it is complicated or confusing, it is OK to call the IRS to get more explanation as well as an extension of time to respond. Use the phone number on the letter. You can also reach out to a tax pro like a CPA. Many tax pros will give you a half hour or so of time at no charge. Ask about that.
• Fail to follow through with any deals you negotiate with the IRS. OK, “deals” is probably the wrong word. It is incredibly rare to actually cut a deal with the IRS in spite of all those ads you see on TV promising to whack your tax bill down. But the IRS will work with you to set up an installment agreement that allows you to pay off back taxes over a period of time. If you cannot make a payment, get on the phone and call the IRS to tell them that you cannot make the payment. Do not just blow it off. The IRS will work with you, but they get a little testy if you are just ignoring your responsibility. And then they can impound your bank account. Pretty easily. And from there, yes, it can get messy.
Bottom line here – file your returns timely and respond to any IRS inquiries timely. And beware of SCAMS – the IRS will NOT call you on the telephone to demand payment or threaten you. Nor will they email you. But they will send you letters. Never ignore the letters.