Common IRS Tax Issues and How to Fix Them

A tax issue is any circumstance where a taxpayer’s filed return or payment obligations are in conflict with the Internal Revenue Service (IRS). These situations can arise from simple errors, unreported income, or disagreements about the amount of tax owed. Receiving a notice from the IRS is the typical starting point for addressing a tax problem. This communication is an opening to a resolution process, and it is important to engage with it methodically and promptly.

Understanding IRS Notices

The primary rule when receiving any communication from the IRS is to never ignore it. These notices are time-sensitive, and failing to respond can lead to penalties and more aggressive collection actions. Read the notice carefully, paying attention to the response deadline, which is often 30 days.

A common notice is the CP2000, which proposes changes to your tax return because information from third parties, like employers or banks, does not match your return. You must respond by the deadline, indicating if you agree or disagree and providing supporting documents. If you disagree, you must provide an explanation and proof.

A CP14 notice is a bill indicating you have a balance due of $5 or more. This is the most common notice for unpaid taxes and demands payment within 21 days. Ignoring a CP14 can lead to the accrual of interest and penalties, so if you cannot pay the full amount, you should contact the IRS to explore payment options.

The CP504 notice is more urgent, stating the IRS’s intent to levy your property, starting with your state tax refund. This notice is sent after previous collection attempts have failed and signifies that more serious actions, such as seizing assets or garnishing wages, could follow. It is a final warning to pay the balance or arrange a payment plan.

A Letter 525 is a general audit notice that informs you the IRS has examined your return and is proposing changes. This letter follows a correspondence or office audit and includes a report explaining the adjustments. You have 30 days to either agree with the findings and pay or formally disagree and appeal the decision.

Correcting Filing Errors and Omissions

Tax compliance issues often involve failing to file a return or filing a return with errors. A failure to file carries significant consequences. The IRS assesses penalties for failing to file and failing to pay, with interest accruing on the balance. For returns due in 2025, if the filing is over 60 days late, a minimum penalty applies, which is the lesser of $510 or 100% of the tax owed.

To resolve a failure-to-file situation, you must gather all necessary income documents, such as W-2s and 1099s, for the unfiled year(s). If you are missing documents, you can request a wage and income transcript from the IRS. Filing overdue returns voluntarily can mitigate penalties.

Amending an Incorrect Return

When you discover an error on a filed return, the corrective action is to file an amended return using Form 1040-X, Amended U.S. Individual Income Tax Return. Before filling out the form, gather all documentation that supports the change, such as a corrected W-2c or a previously omitted 1099. On the form, you will show the original figures, the adjustments, and the new, correct amounts. The “Explanation of Changes” section requires a clear and concise reason for each correction.

Filing Procedure

After completing Form 1040-X and attaching supporting documents, you can file it. The form can be filed electronically for the current and two previous tax periods. For paper filing, find the mailing address in the form’s instructions, and consider using certified mail for proof of delivery. You can track the status of your amended return using the “Where’s My Amended Return?” tool on the IRS website. The tool requires your Social Security number, date of birth, and zip code to show your return’s status.

Resolving Unpaid Tax Liabilities

If you agree with the tax owed but cannot pay the full balance, the IRS offers resolution pathways. A short-term payment plan can grant you up to 180 additional days to pay your liability in full. This option is available to taxpayers owing less than $100,000 in combined tax, penalties, and interest. While interest and penalties continue to accrue, there is no setup fee.

Installment Agreement

A long-term solution is an Installment Agreement (IA), which allows monthly payments for up to 72 months. This option is available to taxpayers who owe a combined total of under $50,000. Applying through the IRS’s Online Payment Agreement (OPA) tool is most efficient and can provide immediate notification of acceptance. Alternatively, you can mail Form 9465, Installment Agreement Request. After the IRS approves your IA, you will receive a letter confirming the terms. Defaulting on the agreement can lead to its termination and renewed collection actions.

Offer in Compromise

An Offer in Compromise (OIC) allows certain taxpayers to resolve their tax liability for less than the full amount owed. This option is for taxpayers with significant financial hardship when the IRS doubts the full amount can be collected. Preparing for an OIC requires extensive financial disclosure on Form 656, Offer in Compromise, and Form 433-A (or 433-B for businesses), Collection Information Statement.

You must provide proof of income, a complete list of assets, and documentation of all monthly living expenses. The IRS uses this financial picture to determine your “reasonable collection potential,” which is the basis for an acceptable offer.

Submission Procedure

The completed application package must be mailed to the IRS location designated in the Form 656 booklet. Unless you meet low-income certification guidelines, you must include a non-refundable $205 application fee and an initial payment. This payment is either 20% of the total offer for a lump-sum cash offer or the first monthly payment for a periodic payment offer. The OIC process often takes six months to a year or more. An OIC examiner will be assigned to your case and may request more information. If accepted, you must pay the offered amount and maintain tax compliance for five years.

Currently Not Collectible Status

For taxpayers experiencing severe economic hardship, the IRS may grant Currently Not Collectible (CNC) status. This is a temporary suspension of collection activities, not a forgiveness of the debt. The IRS will periodically revisit your financial situation to see if your ability to pay has improved.

Navigating IRS Audits

An IRS audit, or examination, is a review of your financial information to ensure it was reported correctly. The IRS selects returns for audit using methods like computer screening and random selection. Understanding the different types of audits can help you prepare.

A correspondence audit is conducted entirely by mail. These audits focus on a few specific items on your tax return, and you will receive a letter requesting specific documents.

An office audit requires you to visit a local IRS office to meet with an examiner. The audit notice will specify which records you need to bring. Bring only the documents for the years and items being examined.

The most comprehensive audit is the field audit, where an IRS agent conducts the examination at your home, business, or accountant’s office. A field audit can cover your entire return and is reserved for more complex returns.

The process concludes with one of three outcomes: a “no change” result, an “agreed” outcome where you accept the changes and pay, or a “disagreed” outcome, which gives you the right to appeal.

Challenging an IRS Decision

If you disagree with an IRS determination, you have the right to challenge it. The IRS Independent Office of Appeals handles these challenges, aiming to resolve disputes without litigation. The appeals process allows an impartial officer, who was not involved in the initial decision, to hear your case.

Preparation for an Appeal

To initiate an appeal, you must prepare a formal written protest. This document must include your name, address, and a statement of your intent to appeal. You must also attach a copy of the letter showing the proposed changes and the tax periods involved. The protest must contain a detailed explanation of the disputed issues. This requires an organized presentation of your case, backed by documentation.

The Appeals Procedure

After you mail your protest, the Appeals Office will schedule a conference if your request meets the requirements. This informal conference, held by phone, video, or in person, is where you or your representative discuss the case with an Appeals Officer. The purpose is to negotiate a settlement based on the “hazards of litigation.” The Appeals Officer will consider the strengths and weaknesses of both positions and may compromise to avoid the time and expense of Tax Court.