How to Fix a Tax Mistake

tax problems

Do you ever wonder if you’re really filing your tax return correctly? Do you worry about a possible audit by the IRS? If so, you’re not alone.

Sometimes tax returns do end in difficulties. Maybe you checked the wrong box, or didn’t realize what your tax preparer was reporting. Or maybe you or the IRS made a mistake. Whatever the reason, the need to revisit your returns after filing is never welcome.

Here’s how four women dealt with their own personal tax nightmares — and what they learned.

 

Her Savings Account Was Levied

Her Savings Account Was Levied

What happened: A few years ago, Lindsay Daly, 29, lived in Massachusetts for the first three months of the year and didn’t have health insurance (which is required there). She then moved to New York for a job, complete with health benefits. At the end of the year, Daly’s father mistakenly filed taxes for her as a full-year Massachusetts resident, which left her with a penalty of $2,000 for the lack of health insurance.

However, Daly was not aware she owed anything. “I never received so much as a phone call or a letter from the Massachusetts Treasury or the IRS, until my bank sent me a notice saying my savings account was being levied,” she says. “You can imagine my shock. It was traumatic for me; I have always paid every bill on time and have excellent credit, and I immediately thought, ‘My credit score will tank and I’ll never get a mortgage.’”

How she handled it: Once Daly and her father figured out that the issue was with her residency, she had to refile her taxes — and she came to the conclusion that she was actually owed money. However, she still had to pay $150 up-front to settle her account. A month later, she received a refund check for $175, and her payment of $150 was returned.

What she learned: “As well-meaning as your father may be, take control of your own finances,” Daly says. “I was in my twenties when this happened, and could have stepped up and been an adult sooner.” These days, Daly does her own taxes using the H&R Block online system, and she’s gotten bigger refunds than when her dad was filing her taxes for her. “It’s also satisfying to know that you can be in charge of your own finances, and has helped me to be more proactive in managing my money better as well,” she says.

She Had to Pay an Unexpected $7,500

She Had to Pay an Unexpected $7,500

What happened: Tonne Khabir, a chef who owns a catering business in Dallas, received a letter from the IRS stating that they had found discrepancies in her tax return. She had paid handsomely for a CPA/attorney and been assured support if she was ever audited. However, when she contacted him for help, he said he would need a retainer of $5,000 to deal with the IRS. She decided she would handle it herself.

How she handled it: “I invited the Internal Revenue Service to my home, where my office was located, and we went over the information they said they had on me,” Khabir says. “I cooked dinner as we spent six hours going over my forms.” Rather than protesting the IRS, Khabir decided to simply pay the amount she was told that she owed. She paid off the $7,500 in one year, she says.

What she learned: Khabir says she learned that using QuickBooks and TurboTax “is more of a guarantee for small business, and it is compliant with the U.S. Department of Defense Finance Agency,” she says. The experience also opened up business opportunities — she now almost exclusively caters for government agencies.

Her Taxes Were Never Withheld

Her Taxes Were Never Withheld

What happened: When she was fresh out of college and 21 years old, Kate Cremin wanted to travel and ended up working in Hong Kong as an English teacher. She was horrified when a large tax bill (just over $7,000) arrived in the mail. Instead of having taxes withheld throughout the year, Cremin had been taking home her entire paycheck and was responsible for paying the entire year’s worth of taxes at once.

How she handled it: “I had been living on a tight budget all year, so I had a small savings cushion,” Cremin says. “Paying my tax bill left me with just enough cash to pay for my flight home for Christmas. Not much to show for a year of hard work.”

What she learned: She learned how the tax system worked. “The next year I made sure I saved for taxes, as well as for myself,” she says. “I put the tax savings into a monthly time deposit bond, which prevented me from raiding them. And the system worked pretty well. Over time, I got into the discipline of a second savings account — one for me and one for the tax authorities. Putting slightly more into my savings account cushioned the blow when the annual payment came around.”

Her Tax Return Was Never Filed

Her Tax Return Was Never Filed

What happened: In 2013, Dominique Reese called the New York Department of Taxation and Finance to get an update on the status of a refund. During that phone call, she learned that she had a tax liability of more than $6,000, dating from six years earlier. The representative told her the state never received her return for 2007.

Although Reese had a copy of the return and a cover letter from her previous tax preparer stating that he had filed the return, the state had no record of receiving it. The actual tax owed was about $3,000 and the rest was penalties. “I didn’t receive any letters, but I had moved several times since 2007,” she says. “So essentially, it took six years for me to learn about the situation.”

How she handled it: The state agency representative told Reese that “the best thing I could do was set up a payment plan in order to prevent a warrant for my arrest from being issued,” she says. “I couldn’t believe what I was hearing. I guess my timing was perfect, and in the end I was glad I called in.”

She set up the payment plan and the warrants were not issued. Reese also assigned power of attorney of her tax situation to her current tax preparer by filling out some forms, getting them notarized and sending them back to New York State. He reviewed the situation in detail and concluded that she did owe the money. She now makes payments of $245 each month.

What she learned: The experience taught Reese never to expect a refund and to question why she’s getting a refund if it doesn’t seem obvious. She also learned it’s always worth a phone call to the tax preparer to review the return together and to ask questions about deductions or credits that aren’t familiar. And “when situations hit the fan and they are totally beyond your capacity to handle yourself, seek the advice of a professional,” she says.

Reese says the experience reinforced the need for a solid financial foundation for emergencies. But if you don’t have the money to immediately pay what you owe, setting up a payment plan is viable. “Don’t worry about being able to afford it right away,” she says.

You Might Also Like:
Who Will Be the Most Financially Stable in 5 Years?
6 Real-Life Lessons in Crisis Management
Stop Living Paycheck to Paycheck

What’s Worse Than an Audit?

What’s Worse Than an Audit?

Do you ever wonder if you’re really filing your tax return correctly? Do you worry about a possible audit by the IRS? If so, you’re not alone.

Sometimes tax returns do end in difficulties. Maybe you checked the wrong box, or didn’t realize what your tax preparer was reporting. Or maybe you or the IRS made a mistake. Whatever the reason, the need to revisit your returns after filing is never welcome.

Here’s how four women dealt with their own personal tax nightmares — and what they learned.

[Editor’s note: This was originally published February 10, 2015.]