You've filled out all the paperwork, checked boxes and now you're ready to know what your tax refund will be.
That moment when your tax preparer, CPA or tax prep software start calculating what you'll get back (or what you'll owe) is gut-wrenching. Why? Because no one wants to fall victim to a tax nightmare. Unexpected tax bills, audits from hell and identity theft are just a few of the boogeymen terrifying taxpayers every year.
Here's a list of some real tax nightmares Americans have encountered.
1. Owing Money for Your Deceased Spouse
Paying taxes is no fun, but for certain expats and for Americans married to expats, tax law can be confounding. The Foreign Account Tax Compliance Act — also known as FATCA — is designed to prevent Americans from sheltering their money in foreign tax havens. But for one family, this apparently well-intentioned law led to a total disaster. In an op-ed in the Wall Street Journal, financial adviser David Kuenzi told the story of an American school teacher whose Swiss husband died of cancer. She evidently didn't realize that she was obligated to disclose her deceased husband's Swiss pension. That's when things spiraled out of control for the widow.
"Despite having paid all of her U.S. taxes on time," Kuenzi wrote, "she is advised by a California law firm to enter the IRS's Off-Shore Voluntary Disclosure Program. She paid the firm a retainer fee of $124,000 to begin the OVD process and was told to expect penalties of up to $800,000."
2. Being Left on the Hook for Tax Preparer Fraud
Remember, it's a good idea to properly vet your tax preparer: If they commit fraud, you'll likely have to return a big chunk of your refund.
Several California residents learned this lesson the hard way back in 2013 when their tax preparer was charged with 10 counts of falsifying tax returns as part of a multimillion-dollar scheme. These clients had to pay thousands of dollars back to the IRS after the fraud was unearthed, according to the San Jose Mercury News.
"I felt bad in the beginning," Oscar Sotelo, one of the victims, told the paper in Spanish. "I had to pay so much money. I didn't understand why."
3. Paying Your Identity Thief's Tax Bill
Arizona resident Cliff Goodenough found himself embroiled in a decades-long battle with IRS, after bogus income tied to earnings at Las Vegas casinos kept showing up on his Social Security, reported CNBC in 2013. Despite Goodenough's attempts to illustrate the income wasn't his, the IRS moved to collect on it, and, when he didn't pay, they tapped his bank account.
Goodenough was ultimately able to clear his name after receiving a letter from the IRS in 2004 that bore his Tax ID number under a different name. Turns out, a Chicago businessman who had fled his personal and financial problems back in 1979 was using the number to commit identity theft. The man ultimately plead guilty to fraud and was ordered to pay Goodenough nearly $11,000, CNBC said.
4. Dealing With an Inept Auditor
Just like in any profession, there are good auditors and bad auditors. Shauna Wekherlien, the owner of Tax Goddess Business Services PC in Scottsdale, Ariz., told MainStreet a yarn about a client who experienced one of the bad ones.
Wekherlien said a young auditor was sent to look into a business's record books, and thought that there was a November bank statement missing.
"Of course, the auditor had the November bank statement, but didn't understand the bank statements didn't close exactly on the first of each month and end on the 31st of each month … The auditor actually threatens my client, saying that if he did not provide the November bank statements he would have the 'entire IRS come down on him so hard that he wouldn't know what hit him.' It was at this point that we requested a new auditor. When you have an auditor [who] doesn't know how to read bank statements, you know you're in trouble," Wekherlien said.
If you're worried about being audited, here's what you need to know about whether it can happen to you.
5. Having Your Refund Stolen
Taxpayer identity theft is becoming all too common. The IRS is actually anticipating about $21 billion in tax refund fraud this year. Pamela Knighton, a social worker from Cuthbert, Ga., is one of the Americans who had their tax refund stolen back in 2014. According to CNN, Knighton had to wait more than six months for her $1,000 refund — money she badly needed, given she was making less than $25,000 a year.
"I'm one of the working poor and don't have a lot of money," she told CNN. "I'm still trying to buy my own home and I'm always running low on my [bank] account."
Remember, there's no failsafe when it comes to taxpayer refund fraud, but you can minimize the odds of falling victim by filing early. If you know your Social Security number or other identifying information has been compromised, you should keep an eye on your financial accounts and your credit to prevent other types of identity theft as well. You can check your credit reports every year for free at AnnualCreditReport.com and you can monitor your credit scores for free every month on Credit.com.
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