Tax season can be challenging for expat taxpayers, especially if they want to file their returns correctly and on time. However, issues with the IRS can arise and make it even more difficult to keep up with. It pays to know what kind of tax issues you can face, as well as the type of resolutions available to you if you do.
This article will provide you with an in-depth guide on common IRS tax issues, as well as the tax resolution methods you can use to resolve your IRS tax issues.
Common IRS Tax Problems
It can be worrying to receive a notice from the IRS, but it is not an uncommon experience. The average taxpayer may encounter issues in their tax filing and payment that will prompt the IRS to reach out to correct them or pursue certain actions. Some of these common tax problems include:
Tax Return Error
If you are doing your own taxes, you may end up making a few mistakes. This can range from simple errors in filing status or listed number of dependents to more complicated ones like incorrect income or wrong deduction claim.
The IRS will normally find these errors and notify you of corrections if you did not file an amended tax return under Form 1040-X beforehand.
Underreported or Unreported Income
Another error that can occur when filing tax returns is a mismatch between your reported income and information reported by your employers or financial institutions. Depending on the difference, this discrepancy could cause your tax to increase or decrease.
In response, the IRS will send a CP2000 notice to inform you of the differences and other relevant information, as well as the possible effects it may have on your tax return.
Failure to File a Tax Return
Normally, three criteria impact your need to file a return with the IRS: age, filing status, and income. Certain income levels are required by law to file tax returns. The IRS releases annual guidelines for this, as the amounts are adjusted to account for inflation.
Depending on the reasons for failure to file a tax return, the IRS may send notices such as the CP59, CP63, CP259, and so on.
For those expecting refunds from the government, failure to file within three years may cause you to lose out on your money. Meanwhile, for those with tax debts, it can result in a penalty worth 5% of the unpaid taxes for each month or part of a month that a tax return is late—going as high as 25% of your unpaid tax bill.
Failure to Pay Full Amount
If IRS calculations determine that you have not paid the full amount for your owed taxes, you will receive a form CP14 notification. This notification will explain how much you owe, how to pay it, and when the payment is due.
This tax issue often comes with a failure to pay penalty, which costs 0.5% of the tax owed after the due date, for each month, or part of a month the tax remains unpaid, reaching up to 25% of the total.
Unpaid Penalties and Fees
Failure to meet your tax obligations like filing tax returns on time, paying taxes owed in the right way, and preparing an accurate tax return can result in various penalties. These penalties can also accrue interest at varying rates or be repeatedly charged monthly until the full balance is settled.
A tax levy occurs when taxpayers are unable or—in the case of delinquent tax evaders—unwilling to settle their tax debt. This results in the IRS legally seizing property in lieu of payment to satisfy the tax debt.
A tax levy permits the IRS to garnish your wages, take money from your bank or other financial accounts, and seize any vehicles, real estate, or other personal property to be sold. Notification of a levy being issued will come from the following IRS notices: LT11, CP504, CP90, or CP91.
If you neglect or fail to settle a tax debt, the IRS may opt to file a tax lien against you to protect its interest ahead of other creditors. Under this process, your due balance is assessed for your overall liability, and a legal claim is made over all your property, including real estate, personal property, and financial assets.
The IRS files this through Letter 3172, which is sent to you and your other creditors. This guarantees that the government will receive any benefits from your asset liquidation to pay off your tax debt.
7 Tax Resolution Methods
Tax problems can arise from different circumstances. Different tax resolution methods exist to address particular issues or circumstances. Deciding on the appropriate tax resolution method will depend on the specifics of your situation.
Under an installment agreement, you agree to pay back your entire tax debt through monthly installments up to six years. This method is prevalent as it splits up the debt into small, manageable amounts across a given amount of time. This also allows you to avoid any late payment penalties and fees, preventing additional spending.
There are several short-term and long-term payment plans available for this agreement. Once the tax debt is paid in full, any tax liens imposed on you will be released by the IRS, bringing you back to a current and compliant status.
Partial Pay Installment Agreement
A partial pay installment agreement is similar to a regular installment agreement, save for one key difference. In a partial pay installment agreement, you can make lower monthly payments than in the regular installment agreement.
Qualifying for a partial pay installment agreement occurs when you owe the IRS at least $10,000. You will also be required to file all previous tax returns and be current with your tax withholding or estimated tax payments.
Once this agreement is enacted, you will be subject to a financial review every two years to determine whether to increase your installment payments if your financial situation improves. Otherwise, you can continue paying the reduced installments until the expiration of the statute of limitations. Any remaining balance after will be forgiven.
Currently Not Collectible Status
Some situations may cause you to be unable to settle your tax debt—this includes financial hardships. When it is clear that your expenses are too great and you’re unable to afford basic needs on your income, you can file your status as “Currently Not Collectible.”
However, the IRS will require proof of “significant hardship” for you to receive this status. This includes documentation of any unused assets, monthly income, and necessary living expenses. You may even be asked to file a Form 433 financial statement supplemented with the paper trail for your expenses and income.
When the Currently Not Collectible status is active, it stops the IRS from collecting your tax debt. However, this will not stop them from charging additional interest and penalties. The IRS will also be entitled to any of your future refunds until the tax bill is paid.
The IRS often charges penalties and fees for failing to follow tax laws or IRS regulations. If you cannot pay your tax debt on top of the growing penalties, you may request penalty abatement. Penalty abatement is typically granted under special circumstances, namely the First Time Penalty Abatement policy qualifiers and those that the IRS finds with reasonable cause.
The First Time Penalty Abatement policy covers individuals who did not previously have to file a return or have had no penalties for the prior three tax years. These individuals must be able to file all currently required returns (or have filed for an extension) and have paid or arranged to pay any due taxes.
For those with Reasonable Cause, the IRS will investigate all facts and circumstances to establish if you exhausted all means to meet your tax obligations but were still unable to do so.
If approved, your penalties will either be reduced or completely removed. This tax resolution method does not absolve you from your tax debt but helps to reduce the amount that you need to settle.
One of the most straightforward tax resolution methods is to file your tax returns properly. You may have tax debt due to the penalties and interests imposed on late or missing tax returns. Getting your tax filings current and compliant is the best way to address these issues and possibly uncover other problems or missed benefits in the process.
Offer in Compromise
If you cannot pay off your tax debt even in small increments, you can make an Offer in Compromise. This method allows you to negotiate with the IRS to pay off a lesser amount to satisfy the tax debt without any penalties or interest.
The IRS takes all facts and circumstances in your case into consideration when determining if you qualify for an Offer in Compromise. This includes your ability to pay, income, expenses, and asset equity. Depending on the offer made, you may be permitted to settle in either a lump sum cash payment or through periodic payments.
This tax resolution method is best suited for those who cannot pay their full tax liability without causing financial hardship.
Statute of Limitations
The statute of limitations for the IRS to collect on past-due taxes is 10 years after the IRS assesses a tax liability, usually denoted by a Collection Status Expiration Date (CSED). Once the CSED has passed, the tax or any of its remaining balance cannot be collected.
Relying on the Statute of Limitations to resolve your tax issues has very limited viability, as the IRS is likely to collect through a tax lien or levy if you still have any assets, wages, or property for the entire 10 years.
Solve Issues through Tax Resolution
Whether you’re doing your own taxes or working with tax professionals, getting your filing and payment in order is essential. If you fail to comply with or correctly proceed through your tax obligations, issues with the IRS can arise. In the event that you find yourself saddled with a tax problem, knowing your options to resolve them can save you a lot of trouble.
Struggling with a tax problem? Tax Samaritan offers professional tax resolution services that can address your expat tax needs.