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IRS issues: Getting tax withholding right can be a challenge

New laws often cause some measure of confusion in their first years. When the Tax Cuts and Jobs Act of 2017 went into effect, it was no exception. It created confusion for a lot of taxpayers, many here in Massachusetts included. Now, the IRS is advising taxpayers  to make sure their withholding is correct in order to avoid problems during tax time, but getting it right could present a challenge.

Adjusting the amount of taxes that an employer takes from an employee's paycheck helps control whether a taxpayer receives a refund or pays the IRS at tax time. It could also help adjust those numbers up or down. Moreover, changing withholding could affect how much individuals receive as income each pay period. Those wanting more income each month would increase the number of allowances claimed on their W-4 forms and decrease them to pay more taxes during the year to increase the potential for a large refund.

Filing an audit reconsideration request

Getting the IRS to change its decision regarding how much a particular Massachusetts resident owes in taxes is not an easy task. The taxpayer must provide compelling reasons for the agency to approve an audit reconsideration request. In order to even get such a request past the first layer of review, it must meet certain criteria.

For instance, the reason for the reconsideration must fall into one of four categories. If a Massachusetts resident did not attend the audit or did not receive IRS communications regarding the audit due to a move, the IRS may grant the request for reconsideration. The other reasons why a request may be granted is if the taxpayers disagrees with the assessment or has additional information not available to the IRS during the first audit.

The new withholding form released for comment by the IRS

Filling out a withholding form (the W-4) is the first step in paying taxes on income. The IRS recently released a new form it wants to use for withholding that complies with the changes of the Tax Cuts and Jobs Act. The public may comment on the new form through July 1.

When the Tax Cuts and Jobs Act went into effect, it eliminated certain exemptions and deductions that had a significant impact on many taxpayers, including those here in Massachusetts. Since the W-4 form determines the deductions employers take out of workers' pay, this form needs to account for these changes. The new form will require more specificity from taxpayers and should account for households in which a wage earner has more than one job.

Keep tax records in case the IRS makes contact

Once Massachusetts residents file their tax returns, they may immediately put them out of their minds. Who can blame them? No one wants to pay taxes, and any dealing with the IRS can cause anxiety. While it is possible to move on and forget about taxes until the following year, records should still be kept -- just in case.

Taxpayers here in Massachusetts and across the country may put taxes out of their minds after they file them, but the IRS may not. Depending on the circumstances, the agency could come back to you years after filing and ask questions, initiate an audit or claim you made an error. It would be in every taxpayer's best interests to retain the records and returns for each tax year for a number of years.

Who does the IRS expect to make estimated tax payments?

Paying taxes is something that nearly every Massachusetts resident must do. People who work as employees often have a certain amount of taxes taken out of their checks each pay period in order to help meet that obligation to the IRS and other applicable tax authorities. This often makes matters simple for them since they never see the money and do not have the responsibility of making sure those payments are made.

The issue becomes more complicated for independent contractors, business owners and others who are self-employed. The IRS expects them to handle their tax obligations themselves. This usually means making estimated tax payments periodically during the year. Unless a taxpayer was a U.S. citizen or resident and had no tax liability during the prior year, which included a 12-month period, the agency expects these individuals and entities to pay estimated taxes.

Federal tax liens and tax levies are different

Massachusetts residents who cannot afford to meet their obligations to the IRS could find themselves facing a variety of repercussions. Two of the possible consequences are federal tax liens and tax levies. Some people use the terms "lien" and "levy" interchangeably, but they are different.

When the IRS uses a tax levy to satisfy unpaid taxes, it actually seizes property. This usually involves seizing bank accounts, seizing property and/or garnishing a taxpayer's wages. This action is often taken after a tax lien.

Forget to pay taxes? Pay now to avoid additional penalties.

Taxpayers who fail to pay their taxes can face additional penalties — even if the Internal Revenue Service (IRS) granted an extension. It may seem counterintuitive, but the agency can continue to charge interest and may even apply penalties if you do not pay your tax bill by the April 15th deadline.

Are you part of this group? If so, the IRS recently published a news release with some clarification.

Does the IRS expect teenagers to pay taxes?

Summer is approaching, and many teenagers living here in Boston or elsewhere may begin thinking about getting a job to earn some extra money. Entering the workforce can provide a sense of freedom and independence, but it can also require a wakeup call to the responsibilities that adults tend to assume without much thought. For instance, the IRS expects teenagers to pay taxes and possibly even to file an income tax return.

Age has nothing to do with fulfilling this civic responsibility. A teen may expect to bring home all of his or her wages, and getting that first paycheck could be a shock. When a teenager takes a job, his or her employer is responsible for deducting and paying payroll taxes for every employee, including those who have not even reached the age of majority.

Prepare now for dealing with the IRS next year

Tax time has come to a close for this year, and most people want nothing to do with the subject until much later in the year or nearer tax time next year. While many Massachusetts residents can empathize with that sentiment, it may not be the best course of action for dealing with the IRS. In fact, there may be some steps to take now that could make tax time go more smoothly next year.

For instance, now would be a good time to starting paying into a 401(k) or an independent retirement account, or IRA. Participants avoid taxes on the funds in these accounts until the money is taken out of them. Moreover, contributions to a 401(k) come out prior to earnings being taxed. In addition to avoiding taxes on these amounts, Massachusetts residents are building funds for retirement. It could be seen as a "win-win" situation for many people. 

Some in Massachusetts could file tax refund claims with the IRS

It is not surprising that many Massachusetts residents feel as though the IRS was not fair with them. Some of them are obligated to pay large tax bills with no avenue for relief other than working out a payment plan or some other agreement with the agency. However, others could have valid tax refund claims if the circumstances are right.

Many Massachusetts residents have financial obligations that they may not be able to pay such as past due child support, alimony or state or federal taxes, along with other federal debts like student loans. When a married couple files a joint tax return expecting to receive a refund, they could be in for a surprise. The government may seize that refund in order to satisfy those debts.

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