If you are like most Americans, you pay your taxes, but you try to avoid overpaying them by making sure you get all the right deductions and tax credits. After all, who wants to send Uncle Sam more money than he’s entitled to from the paycheck you work so hard for?
Trying to minimize tax obligations and be smart about what you file and what you write off can help you financially, but it can also open you up to potential issues in the future. For example, you could accidentally pay less than you owe, leaving you vulnerable to action by the Internal Revenue Service.
If the IRS determines that you have not paid the full amount of taxes they believe you owe, they will send you a letter of deficiency indicating that they expect you to pay the rest of your taxes in full as soon as possible. Getting a letter from the IRS can feel frightening, but you should not panic. Instead, you need to think about how to protect yourself moving forward.
Just because you receive a letter of deficiency doesn’t mean you owe taxes
Although it may surprise you to hear this, it is possible for the IRS to send these letters in error to someone who does not owe additional taxes. Whether due to an issue with a misplaced digit in a social security number or innumerable potential human errors, mistakes happen.
The result of a typo could be the IRS believing it should receive more tax money from you than you owe or paid. The first step you should always take is to have a professional carefully review your financial statements and tax returns for thoroughness and accuracy.
It may be possible that you made a mistake, which you can then correct with an amended return filing. If the mistake is on the part of the IRS, you will likely need to take action to protect yourself and ensure that they update their records to correct the mistake.
Underpaying taxes could put you at risk for an audit
Whether you are a business owner or an employee, errors or issues on your tax return increase the likelihood of facing an audit. However, as with the letter of deficiency, receiving notice that you will face an audit is not the end of the world.
It simply means that you will have to review your tax returns and explore whether there were mistakes or deficiencies in your tax filing and payments. Working with an accountant can help you ensure the accuracy of your own records, while an attorney can help you protect yourself from additional potential consequences.