Oops! Now what?
Donna H. Laubscher, CPA
So, you come home after a long day at work and there’s an envelope in your mailbox with the return address of the Internal Revenue Service. Scary, scary, scary! You do one of two things: set it aside and pretend you’ve never seen it – like if there was a big, hairy spider in the corner; or, you sit down, pour yourself a glass of wine with your emotions in the pit of your stomach, open your envelope and read the correspondence from the IRS. Here are some of the items that might be on said correspondence.
Where’s your return? The IRS has yet to receive a tax return, so you have not filed a timely tax return. Usually, the IRS sends these if they have some matching documents on file and want you to get the information to them. If the IRS does not receive a return that you have filed, then they can prepare a SFR (Substitute for Return). This is not generally the way to go – they don’t have any deductions reported to them, so it is just income! Terrifying!
There’s a problem with your information. Another option might be that there is missing or incorrect information on your return. Say you sold some stocks and you didn’t report it on your return, the proceeds were reported to the IRS; they’d want to know the difference. Or, you started receiving an IRA distribution and you forgot to include it on your return. So, you can either send them the support for the missing or incorrect information. Or maybe they are right. But you need to open the envelope to actually see what it says.
Family info. Sometimes the mistake can be something that seems to be, in theory, more innocuous, but in reality it causes some of the greatest tax grief. I’m talking about marriage. If you were married during the year and your spouse either did or did not update her name with Social Security, it’s possible the wrong name and/or Social Security number could be on your returns. Or, maybe you transposed a Social Security number for you or a dependent. Frankly, these are some of the most complicated things to fix. Many times, we will actually need a copy of the Social Security card to get it corrected. And even then, it can be difficult, especially if one of your dependents has four names; it is difficult to determine what goes in the first name box, what is the middle initial, etc. Doesn’t sound like it should be that difficult, but it can be very time consuming to correct.
Where’s my refund? Sometimes the correspondence may be related to your refund, which you thought you would have already received but it isn’t in your account. Generally, this is because you have put an incorrect routing or bank account number on your tax return for the direct deposit. This can take months to correct, unfortunately. You may need to fill out paperwork with the IRS requesting a new check. This is another time consuming thing to rectify.
Filing status. There are other scary mistakes that you can make with your tax return that may not always results in a notice from the IRS or other regulatory agency. One of these is an incorrect filing status. There’s an urban legend that in the year you get married you can pick as your filing status any of the filing statuses you had during the year. This is not correct. Your filing status is determined on December 31 of the calendar year, so if you get married on December 31, 2017, you are married for the entirety of 2017 for tax purposes. (Exceptions if your spouse died during the year – not covered here.) IF you have chosen the incorrect filing status, you may have either paid too much tax or too little tax. The latter you may not think of as being so scary – but if the IRS questions it, then there may be interest and penalties to correct it.
Elections. One of the most frightening mistakes can be related to elections that are on your return and shouldn’t be or aren’t on your return and should be. For example, you haven’t had any taxable income for the prior two years and you still don’t have any taxable income in the current year, but you still make the election to carry forward your net operating loss. This can be a mistake if you are under audit and income debts are added to your tax return, you’ve foregone your ability to carry back the net operating loss.
An example of an election that you may miss on your return might be related to your status as a real estate professional, which can have some favorable tax consequences if done correctly. Another election you might miss is an election related to the tangible property regulations. Both of these missed elections can cause losses to not be deducted currently. When dealing with elections, you may want to get the assistance of a tax professional.
Paying your taxes. If you owe on your tax return, but cannot pay the amount in full, don’t compound the problem by not filing your tax return. By filing on a timely basis, you can eliminate any late filing penalty and deal solely with a late payment penalty. These penalties can be concurrent, so you want to at least avoid the late filing penalty, which is 5% of the unpaid taxes for each month that the return is late. The late penalty for late payment, by contrast is 0.5% for each month or part of a month for late payment.
Probably the easiest way to double check a potential notice, or what was filed, is to make sure you keep a copy of your tax return. Having the copy of what was filed available can alleviate any potential horror by lessening the time it takes to deal with notices or issues.