5 tax nightmares
By Credit.com
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. 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.
4. Forgetting about income from your side job
Pat F. Bass III, an internist and pediatrician in Shreveport, Louisiana, told LearnVest he thought he didn't have to pay taxes on his side gig as a consultant.
"The extra money was great -- I used it to travel, invest more and have fun," Bass told LearnVest. "By the time my accountant informed me that I should have been estimating my taxes and paying quarterly, it was too late. I'd accrued fines, as well as a tax bill of $7,500."
Income from a contract job is often paid to workers without taxes being withheld, which is what got Bass in trouble. You can read more about how an unpaid tax bill can impact you here.
5. Waiting years for a refund
As if death, taxes and identity theft aren't stressful enough on their own, one woman found herself dealing with all three at once after her husband died and had his identity stolen. Because someone filed a fraudulent tax return in her late husband's name, Wendy Boka Gonzalez ended up waiting 850 days for the refund the IRS owed her from her final tax return with him. In that time, she had moved and remarried.
"It's pretty crazy I got remarried before this was sorted out," Gonzalez said.
Click here to see more tax nightmares taxpayers have encountered over the years.