4 Common IRS Income Tax Tripwires

You don’t want to mess with the Internal Revenue Service. One minor mix-up when handling your finances can cost you big.

For example, the IRS has increased its filing of levies, liens, and wage garnishments in recent years. In fact, in 2019 alone, approximately 2.5 million levies were filed.

We offer this list of common ways people get into trouble with the IRS.

1. Filing too many exemptions. An exemption gives you a significant tax deduction, and some taxpayers can’t resist the temptation to report more exemptions than they’re entitled to.

You can only claim exemptions for yourself, a spouse, and for all “dependents.” However, dependents have to meet specific criteria, so make sure you follow the IRS guidelines to avoid mistakenly filing an extra exemption.

2. Being unaware of taxes levied for early withdrawal from specific retirement plans. If you withdraw from a retirement fund such as a 401(k) or IRA before you’re 59 1/2, you may face a 10 percent federal penalty on your investments, as well as a state penalty and an income tax on the money withdrawn.

3. Not paying enough taxes when self-employed. Many people who own their businesses don’t know how much they have to pay in taxes. The tax structure for a self-employed person – what to pay, how to pay, and what can be deducted – is decidedly complex, so it’s easy to become confused.

4. Not paying taxes on winnings. It is necessary to report all gambling winnings as income, including winnings from lotteries, casinos, and horse races.

For people in trouble with the IRS, various programs can provide debt relief if a taxpayer qualifies. We help our clients determine if they meet the requirements for one of these IRS programs. Our staff includes certified public accountants, attorneys, enrolled agents, and other experts that offer tax services, financial planning, small business services, and other assistance.