The IRS is the most effective collections agency in the world.
No one wants the IRS after them.
With that in mind, here are some common ways taxpayers find themselves in trouble with the IRS.
One of the most frequent errors in dealing with the IRS is failing to file a return.
Everyone living in the United States and earning an income here is subject to filing a tax return, if your income is above certain minimum thresholds.
Many taxpayers mistakenly believe that, for some reason or another, they do not reach filing status.
Failure to file, when so required, will attach penalties and interest to whatever taxes you owe.
These penalties and interest can accrue over time to the point where they eclipse the initial tax liability.
If you fail to file when required to do so, the IRS has the option of filing a return for you.
You are then liable for any taxes the IRS says you owe on this return.
Some taxpayers claim excessive exemptions on their W-2 forms and are then faced with owing the IRS come April 15.
This is known as under withholding and occurs because the amount of withholding taken from the employee's paychecks is not enough to cover the amount of taxes due at year's end.
Again, this typically happens because the employee overstates the amount of exemptions on their W-2.
Owners of businesses and the self-employed often find themselves in a tax jam because of estimated taxes.
This particular group has to pay their taxes quarterly or even monthly based on their earnings and estimated taxes.
Since they work for themselves, they are solely responsible for their tax liability.
If you should be making estimated tax payments and fail to do so in the course of the year, you could be facing a very large tax liability when you file your return.
Many first time business owners and those recently self-employed are not even aware of the need to file estimated tax payments.
When starting out on your own, you should consult with a tax expert in order to determine what rights and obligations will be entailed in your new filing status.
There are other reasons a taxpayer may find himself or herself unwittingly in debt to the IRS.
Perhaps, there has been a personal or health crisis in the family and the taxpayer forgot to file or was unable to pay due to the crisis.
There are contingencies provided by the IRS in these situations that would allow you to be billed for the unpaid amount, as long as you can document your crisis as being genuine.
Sometimes a taxpayer makes mistakes by claiming credits, deductions, or exemptions to which they are not entitled.
In this case, the IRS will generally contact the taxpayer and ask for documentation as to how they qualify for these reduced liabilities.
If such documentation is faulty, the IRS will recalculate the return and the taxpayer shall be charged for any increased tax liability.