In March, the Treasury Department and the Internal Revenue Service announced that the tax filing and payment deadline would be extended to July 15 — but just because Americans have more time to file their taxes this year, it doesn’t mean the process will be any easier. If filing income taxes were easy then professional tax preparers wouldn’t charge customers an average of $188 to file even the most basic returns. That price moves much higher when taxpayers itemize, report multiple streams of income or start a business.
Filing taxes is rarely simple, and for many taxpayers it will get even more complicated this year. So that you can safely file your taxes, know what the problems could be this year.
Last updated: July 2, 2020
Poor Customer Service at the IRS
Budget cuts at the IRS have led to staff reductions and fewer Taxpayer Assistance Centers (TACs), making it one of the federal government’s worst-performing agencies for customer service, according to a report to Congress from Bridget Roberts, the acting National Taxpayer Advocate. Because it’s hard to get appointments at TACs and reach live customer service reps on the phone, many taxpayers must look for help online, which doesn’t always resolve issues.
Failure To Adjust Withholding
Tax changes implemented in 2018 lowered taxes for most Americans and also introduced new withholding tables. Both changes led to more take-home pay for many workers — but only if they adjusted their withholding to make sure enough taxes were taken out of their paychecks. Those who didn’t make the right adjustments last year could end up owing money in 2020.
Confusion Over Health Savings Account Contribution Limits
Another recent tax change was a slight increase in health savings account (HSA) contribution limits for both individual and family coverage. The increases are minimal — only $50 per year for individuals ($3,500 total for tax year 2019) and $100 for families ($7,000 total for tax year 2019) — but if you haven’t familiarized yourself with the new amounts, they might create confusion at tax time.
Outdated IRS Technology
The IRS’ information technology infrastructure is aging and not nearly as efficient as it should be for such a large and important agency. Plans are underway to correct that problem through investments and upgrades, but, for now, tech problems could lead to delayed refunds, security breaches or difficulty processing returns.
Not Tracking Business Expenses Accurately
A growing number of Americans depend on the gig economy to earn money, which means more will file as self-employed. This requires a lot of additional work — including keeping accurate records of business-related expenses. If you don’t keep accurate records, you run the risk of either losing out on deductions or claiming the wrong ones, which could lead to an IRS audit.
Mixing Up Personal and Business Expenses
As more Americans depend on side gigs to earn extra money, many will look to write off business expenses to lower their tax burdens. There’s nothing wrong with this — as long as you familiarize yourself with what can and can’t be deducted. Writing off items that blur the line between business and personal expenses, such as a car or home office, might result in an audit. Always check the IRS rules before deducting expenses.
Delays in Processing Refunds
Recent efforts by the IRS to provide more filters to prevent refund fraud have delayed refunds for many taxpayers, including those whose returns were legitimate. According to the Taxpayer Advocate Service (TAS) report, about 25% of returns chosen by a new filter for the 2019 filing season took more than 40 days to be processed. That could be a problem in 2020 as well.
Not Enough Multilingual Notices
The IRS has been slow to adapt to demographic changes in the U.S., including the rising population of taxpayers with limited English proficiency (LEP). The TAS report notes that despite executive orders requiring federal agencies to help LEP people access services, these people often get IRS notices that aren’t written in their preferred languages, which creates confusion and processing delays.
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Unqualified Tax Preparers
If your tax return is one of the 80 million or so prepared by third-party tax preparers, there’s always the chance it will be inaccurate, incomplete or even fraudulent. Misconduct and incompetence among tax preparers is another problem cited in the TAS report and will likely remain so until the IRS develops a comprehensive tax-preparer strategy.
Not Paying Side-Hustle Taxes
If you’ve taken on a side hustle to earn extra money over the last year, one of your biggest tax challenges in 2020 will be accounting for income that hasn’t been taxed yet. Since side hustles typically involve freelance work with no withholding, it’s your responsibility to keep track of the income and pay taxes on it.
You Might Have To Pay Self-Employment Tax
The changing U.S. employment landscape has pushed many Americans into freelance or independent contractor jobs, which requires them to learn a whole different set of tax rules. One of those rules is the self-employment tax, which is something you must pay on top of your income taxes. The self-employment tax amounts to 15.3% of your net earnings to cover your portion of Social Security and Medicare taxes.
Not Keeping Up With Estimated Taxes
The Bureau of Labor Statistics projects that the number of self-employed workers will rise by 10.3 million during the decade ending in 2026, which means a lot more Americans will pay estimated taxes once a quarter. Failure to keep up with these payments and pay them on time will not only complicate things when it’s time to file your return, but it could also result in additional interest and penalties imposed by the IRS.
Underpaying Estimated Taxes
As previously mentioned, you want to make these estimated tax payments on time to avoid penalties. You also want to ensure you don’t underpay. You’re responsible for keeping records and paying the right amount. If you don’t pay enough, you could face a big payment at tax time.
Problems With Free File
The IRS’ partnership with Free File Inc., a group of tax return preparation software providers, was formed to provide free tax-prep software to more than 100 million qualified taxpayers. But as the TAS report points out, less than 2% of e-file returns were filed using the free products because of dissatisfaction among users. If you qualify for Free File, you might run into headaches figuring the software out.
Help Might Be Hard To Find
Although hiring a tax preparer carries certain risks, sometimes you can’t avoid it. You’ll probably need one if your return is complicated by a new business, income stream or life event. Qualified tax preparers help ensure your return is accurate, but finding one might be tough amid rising demand for their services. If you wait too long to get help, you could find yourself flying solo at tax time.
Loss of Alimony Deduction
If you’re used to deducting alimony payments tied to a divorce or separation agreement, prepare for that to end. The deduction was eliminated as part of the 2018 Tax Cuts and Jobs Act, but this is the first year it’s not deductible on returns. If you’re not aware of the new rule, you might get confused come tax time. You might also lose large sums of money you once wrote off.
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Confusing IRS Audit Correspondence
The IRS’ use of combination letters in about 16% of its audits in recent years has created confusion for many taxpayers and given them inadequate time to respond. These letters combine an initial contact letter and a 30-day notice, each of which serves a different purpose, according to the TAS report. Despite these problems, the IRS plans to expand its use of the letters.
Tax-Debt Relief Needs Improvement
The IRS uses an “offer in compromise” that lets taxpayers pay less than the full amount they owe for tax debts. This helps ensure that financially strapped taxpayers have a little wiggle room. It’s also designed to ensure everyone files their returns properly and on time. However, some taxpayers find the requirements too stringent, and the National Taxpayer Advocate recommends a more liberal policy.
Cash Income Might Draw Additional Scrutiny
If you started a side hustle that deals in cash — such as a weekend food stand or seasonal pop-up shop — you’ll be responsible for keeping track of all your cash income and receipts. A high percentage of cash income also brings extra scrutiny from auditors, so be sure to maintain accurate records.
Appeals Might Not Go Your Way
Taxpayers can appeal IRS decisions through the agency’s Office of Appeals, which is designed to settle disputes without the need for litigation. Some appeals conferences include IRS counsel and compliance teams, however, which makes it difficult for appeals officers to reach conclusions that stray from positions advocated by counsel or compliance teams. This setup runs contrary to the independent appeals process for taxpayers, according to the National Taxpayer Advocate.
Confusion Around the Individual Mandate Penalty
Changes to the tax code made in 2018 didn’t all go into effect that year. One that starts with the 2020 tax season is an end to the federal individual mandate penalty, which imposed tax penalties on those who could not prove they had health insurance. Though the federal penalty has been eliminated, some places impose state or local penalties, including New Jersey, Massachusetts and Washington, D.C. Taxpayers there could get confused by the rules.
The Ever-Changing Medical Expense Deduction
The medical expense deduction has bounced around like a ping-pong ball in recent years, and it will keep bouncing in 2020. The deduction was 10% of adjusted gross income (AGI) from 2010-2016, then it fell to 7.5% in 2017 and 2018, and returned to 10% in 2019. If you plan to itemize your unreimbursed medical and dental expenses, make sure they exceed 10% of your AGI before claiming the deduction.
Scams Are On the Rise
Some taxpayers will find the 2020 tax season much more problematic than usual if they become victims of fake IRS letters sent out by scammers who want to steal Social Security numbers and other sensitive information. Tax scams involving fake correspondence, phone calls and ransomware have been on the rise in recent years. A good rule of thumb is to call the IRS directly whenever you suspect a scam.
Losing Track of Different Income Sources
In the old days, tracking your income was pretty straightforward — you worked for one company, and that company sent you a W-2. But in the gig and side-hustle economy, more taxpayers are getting outside sources of income to supplement their main sources. Keeping up with numerous income streams complicates the process and increases the risk of error.
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