What To Do If You Underpaid The IRS
Underpaid the IRS? It happens to the best of us. We carefully prepare for an appointment with our accountant or we gather all our documents and go through the process of preparing our tax returns. A short while later we receive a notice from the IRS letting us know that we underreported our taxable income. Now what? No sane person wants to underpay their income taxes and invite the IRS into their lives.
The Enrolled Agents at RMS Tax Consulting LLC deal with this problem all the time. They work with worried taxpayers from all over the United States who are in panic mode after receiving the notice in the mail. If you find yourself in this situation here is what you need to know.
It’s important that your tax returns reflect all of the income you have for the year. You should remember, income isn’t just the money you make from your job — it could also include things like freelance income, interest, dividends, monetary settlements, real estate transactions and other income generating activities.
The IRS has a number of ways to verify the income you report on your tax returns. Companies you do business with file “information returns” with the IRS, — W-2s, 1099s, and other forms are filed when businesses distribute income to you. The IRS then matches the information on these business returns to the tax return you file. If the IRS can’t match up the reports to what you reported, it will send you a notice to ask about the difference.
There are other kinds of income such as tips or cash income that may also be considered taxable income but don’t require forms to be filed. It’s your responsibility to track and report that income. If you worked outside the United States you’ll also need to report that income as well.
Here is a list of the most common tax forms that may be issued to you and sent to the IRS.
- Form W-2, used to report wages paid to, and taxes withheld from, employees
- Form 1099-MISC, used to report amounts paid for services performed by independent contractors, rents, royalties, awards, and other payments
- Form 1099-INT, used to report interest paid
- Form 1099-DIV, used to report dividends paid
- Form 1099-R, used to report distributions from retirement accounts
- Form 1099-K, used by payment settlement entities, such as PayPal, to report payments via third parties
- Form 1099-S, used to report the proceeds from the sale or exchange of real estate
- Form 1099-B, used to report the proceeds from the sale of securities
- Form 1099-C, used to report income from the forgiveness of debt
I received an IRS Notice that I Underreported My Income. What should I do?
Read your notice carefully — it explains the information the IRS received and how it affects your return. DON’T IGNORE IT. It’s important that you respond to it whether you agree or disagree with the information. The letter should also explain what actions you can take and it may also come with a response form or other instructions on how to respond.
If the information is wrong, you will need to contact the business or person that reported the erroneous information, ask them to correct it and provide the corrected information to the IRS. Sometimes the information is wrong because somebody else is using your name and/or Social Security number. That’s identity theft and a serious crime. If this is the case you need to contact the IRS immediately to report it and take the appropriate action.
If the information displayed in the notice is correct, you don’t need to amend your return unless you have other additional income, credits or expenses to report. If your tax liability has changed the IRS notice should indicate what the change might be and you may be liable for penalties and interest.
Tips to accurately report your income and avoid tax underpayments
- Keep timely and accurate records of all your income.
- Wait until you get all of your income statements before filing your tax return so you don’t have to file an amended return later.
- Double check all the tax forms you get from employers, mortgage companies, banks or other sources of income for accuracy.
- Your occupation could affect your tax liability-for example if you’re in the military or a member of the clergy. It’s important to know how that affects your tax status. If you’re unsure, consult with a tax professional for guidance.
- Remember that in the 21st century alternate sources of income such as crypto-currencies like Bitcoin and bartered transactions should also be considered taxable income.
With careful planning and accurate record-keeping underreporting your income should not be a problem. But if it is, call the tax team at RMS Tax Consulting LLC at 520-448-3531 today and schedule a free 15 minute consultation. Our tax team can help you determine a course of action that protects your interests and addresses the problem in an ethical and honest fashion. We’re here to help.