In the United States, individuals file a summary every spring of the income received and taxes paid the previous year. This is necessary because the US Tax Code is very complicated and the amount of taxes owed is not only related to income. That means that each taxpayer has to file an annual report, called a “tax return,” in order to answer a simple question: did I pay all the taxes I was supposed to pay?
The tax forms can be long and confusing. The end calculation, however, is not. If the amount that you paid in taxes during the year ends up being less than your total tax owed, then you will be required to make additional tax payments to pay the full amount. You may owe a penalty on the underpayment. Alternatively, if the amount that you paid in taxes ends up being more than your total tax owed, then you will receive a tax refund. In that case, the government will send you a check to give you back your excess tax payments.
Why do people complain about “tax season”?
The process of assembling a tax return can be complicated. It requires filling out a wide variety of forms detailing how much money you earned, whether you earned it as an employee or contractor, whether you bought or sold investments, whether you made any tax-deductible donations, whether you paid an interest on a mortgage or student loans, and more. Unsurprisingly, this takes a lot of time and energy.
Doing your taxes with the actual IRS forms is not easy. Most people utilize tax preparation software in order to help them fill out their tax forms. These software providers offer easy user interfaces that ask you questions about what happened in your life in the past year in order to identify if you are eligible for certain deductions.
To save time and make sure all their forms are in order, many individuals will choose to pay a tax professional to prepare their tax returns.
How do I know if I have to complete a tax return?
If you make below a certain threshold, you do not owe any income taxes and do not have to file a tax return. That specific threshold varies based on your filing status – that is, based on whether you are filing taxes as an individual or as part of a married couple.
For 2021, the IRS set income tax thresholds at the following amounts (i.e., if you earn less than this amount, you do not need to file a tax return):
- Single and under age 65: $12,550
- Single and age 65 or older: $14,250
- Married filing jointly and both spouses are under age 65: $25,100
What is an audit?
The IRS cannot confirm the figures entered on every individual tax return. Instead, the IRS will spot check a wide range of individuals – in the ballpark of 1% of all returns filed – and perform an audit of their tax information. According to the IRS, an audit “is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
You are more likely to be audited if your tax return has certain characteristics that are potential red flags. These so-called “triggers” can indicate that the taxpayer is doing something suspicious and may increase your likelihood of being audited. Some of these triggers include claiming very large charitable donations (which reduce your taxable income), having a large increase or decrease in income compared to previous years, and having lots of numbers on your return that end in zeroes (e.g., $2,000.00). Of course, these can all be legitimate, but the IRS will want to confirm that.
If you are notified of an audit, you will receive detailed instructions about what materials you have to provide and the exact timeline. If that audit reveals that you did not pay the appropriate amount of taxes, you may be subject to significant penalties on your underpayment. The financial penalties can be severe and some audits can result in criminal charges for fraud.
In short, audits are a deterrent measure. The punishments for dodging taxes – even if the chances of actually being audited are small – are intentionally large to discourage misbehavior.
