3 Major Tax Headaches and What You Can Do About Them

Doing your taxes isn't fun even in the best-case scenario, but for most people, they're at least not too painful. You spend a couple of hours entering data into your tax software, file your return, and get a refund check a few weeks later. But that's not how it plays out for everyone.

If you run into any of the following three problems, doing your taxes can turn into a real nightmare. Fortunately, there are steps you can take to minimize the damage. Here's what you need to know.

1. You don't have what you need to file your return

Gathering your tax documents is the first step to filing your return. You'll need your W-2 if you're traditionally employed or 1099s if you're self-employed. You could also have other documents related to property taxes, mortgage interest, savings account interest, higher education costs, and so on. It all depends on your situation.

Legally, employers must send you your tax documentation by the end of January, so you definitely should have gotten yours by now. If you haven't or you've misplaced yours, you should take steps to track it down immediately. Contact your employer if necessary or see if you can look up the information yourself through online accounts.

The tax deadline isn't until April 15, 2024, so you still have time to file. But if you fear you're not going to finish yours in time, you can always request an extension. You do this through the IRS Free File system, not your tax software. This will give you an additional six months to file your return, but it doesn't extend the time you have to pay any outstanding tax debt. If you fail to pay what, if anything, you think you'll owe by April 15th, you could face penalties.

2. You have an unexpected tax bill

Many Americans get tax refunds, but some face unexpected tax bills. This could be a serious problem if you don't have the cash you need to pay the debt on hand. But don't let that stop you from filing your return. Go ahead and file as normal so you can avoid the IRS's failure-to-file penalty.

Then, check out the payment plan options available to you. Most borrowers can choose from short-term payment plans that give them 120 days to pay what they owe or long-term payment plans with agreed-upon monthly payments. You could also try making an offer in compromise, where you tell the IRS what you can afford to pay. If it accepts your offer, you're off the hook for the rest.

Keep in mind that you'll still rack up failure to pay penalties even if you're on a payment plan. This is worth 0.5% of your unpaid debt per month, up to a maximum of 25% of the taxes owed.

3. Your identity is stolen

Identity thieves love tax season because they can fraudulently file returns in other people's names. Many claim deductions and credits you don't actually qualify for to inflate the refund and then have the money sent to them instead. You may not know it's happened until you try to file your real return and it's rejected.

If this happens to you, fill out Form 14039 and mail it, along with a paper copy of your correct tax return, to the IRS. It might take some more time to get your refund and get everything straightened out, but at least you won't get in legal trouble for what the identity thief did.

You should also report the incident to the Federal Trade Commission (FTC). And check to make sure that your financial accounts haven't been compromised. It's a good idea to change all your passwords to your online accounts to prevent thieves from gaining access to them.

If you have any questions about your personal tax situation, it's best to run them by a tax professional. But don't put it off much longer. Get started as soon as possible so you have plenty of time to deal with any challenges that may arise.