10 Pitfalls: How Individuals Often Find Themselves in IRS Trouble

Paying taxes is a civic responsibility that every working American is subjected
to. However, millions of Americans find themselves in hot water with the IRS.
Some are intentional and others are inadvertent, but understanding the common
ways people get into tax troubles can help in avoiding these pitfalls.
Here are 10 common ways taxpayers run into IRS trouble. If you find yourself
owing $10,000 or more to the IRS or state, reach out to our tax resolution firm
for a free consultation. https://www.diehl.cpa/contact/

1. Failing to File Returns:
Perhaps the most direct way to invite IRS scrutiny is simply not filing a tax
return. Some people, especially those anticipating a tax bill, might
avoid filing. This can result in failure-to-file penalties, which can add up
quickly. The IRS will not let this go unnoticed. It’s also important to note that
you can go to prison for a year and be fined $10,000 for each legally required
tax return that isn’t filed.

2. Incorrectly Reporting Income:
Intentional or unintentional underreporting of income is a red flag.
Discrepancies between the income reported to the IRS by employers (via W-2s
or 1099s) and what’s declared on individual or business returns can trigger

3. Claiming Excessive Deductions:

While tax deductions can significantly reduce tax liability, overstepping by
claiming excessive or unwarranted deductions can be problematic. This
includes inflating charitable donations or exaggerating business expenses.

4. Ignoring IRS Notices:
The IRS often sends notices for minor discrepancies or requests for additional
documentation. Ignoring these can escalate the issue, leading to more severe

5. Engaging in Tax Evasion Schemes:
Illegal schemes, such as hiding money in offshore accounts or engaging in
identity theft and fraudulent returns, are serious offenses that can lead to
criminal charges. It’s not a crime for taxpayers to use the tax code to legally
find ways to pay less taxes. However, some people get a little too creative or
they get the wrong advice. Consult with a tax professional before engaging in
schemes to lower your taxes.

6. Misclassifying Workers:
Business owners might be tempted to classify workers as independent
contractors rather than employees to save on taxes. However, if the IRS
determines this is a misclassification, it can lead to back taxes and penalties.

7. Not Making Estimated Tax Payments:
Self-employed individuals and some other taxpayers often need to make
quarterly estimated tax payments. Failure to make these payments or
underestimating the amount can result in penalties and often a surprise tax bill.

8. Not Reporting Foreign Income:

U.S. citizens and resident aliens are typically required to report worldwide
income, including from foreign trusts and bank accounts. Overlooking or
intentionally omitting this can lead to substantial penalties.

9. Engaging in High-Transaction or Cash Businesses:
Those engaged in businesses that deal primarily in cash transactions (like
restaurants, construction, or salons) are often under the IRS radar for
underreporting income. Keep good records in case of an audit.

10. Ignoring State Tax Obligations:
While much focus is on federal taxes, individuals also have state tax obligations.
Neglecting to file state returns or not paying state taxes can lead to trouble at
the state level.

What happens if you land in tax trouble?
IRS problems, once initiated, can escalate quickly, leading to hefty fines,
penalties, or even legal actions. Being aware of these common pitfalls and
ensuring compliance can help individuals maintain a clear record and avoid
unnecessary complications with tax authorities. When in doubt, it’s always
advisable to seek advice from tax professionals or experts in the field.

If you’re facing IRS problems and owe $10,000 or more in back taxes or are
being audited, reach out to our tax resolution firm, and we’ll schedule a free
and confidential consultation to explain your options thoroughly and help you
permanently resolve your tax problem. https://www.diehl.cpa/contact/