There are countless rules and regulations for taxpayers to take note of every year in order to file a tax return with the Internal Revenue Service (IRS). And when just the smallest change in your life can affect your taxes, even those who have been filing for decades can end up confused by the process. Unfortunately, the 2022 tax season is set to be no less confounding. The IRS just made a major revision to one of its most important forms this year, so in order to try to limit confusion, the agency is warning taxpayers to do two things before they file their tax returns. Read on to find out what you should do first.
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Review the guidelines and consult a tax professional about a newly revised IRS form.
iStockOn Feb. 15, the IRS issued a new statement, announcing that it had revised its voluntary disclosure document, Form 14457. This form "permits taxpayers who may face criminal prosecution for willful violation of tax law to voluntarily disclose information to the IRS that they failed to previously disclose," the tax agency explained.
"This is an important form and process for people who recognize it's better to step forward and address their tax situations head-on, before facing IRS enforcement action," Doug O'Donnell, the IRS Deputy Commissioner for Services and Enforcement, said in a statement.
If you want to avoid violating any tax law, the IRS advises you to do two things before filing your return this year, especially since the revised form includes a number of updates. "We encourage people to review the guidelines and consult a trusted tax professional," O'Donnell warned.
One of the most notable updates involves a common error made by taxpayers.
iStockThe IRS made multiple updates when revising Form 14457. But one of the most important additions that taxpayers should take note of this year is an "expanded section on reporting virtual currency." Virtual currency, which includes cryptocurrency, is taxable, and taxpayers may have to report the sale, exchange, or use of virtual currencies on their tax returns.
This has been one of the most common errors made in recent tax seasons. In 2019, the IRS said that it had to mail educational letters to more than 10,000 taxpayers who potentially failed to report transactions involving virtual currency on their return or reported these transactions incorrectly.
"Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution," the IRS warned.
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But this is not the only way the form was revised this year.
iStockThe form's revision covers more than just virtual currencies. According to the IRS, other updates and additions to Form 14457 include a new penalty structure for employment tax and estate and gift issues; a checkbox for the inability to pay in full; and a notice that the agency will now accept all parts of this form through fax to reduce mailing and processing times.
"The updates reflect input from practitioners and stakeholders and take into account trends in the type of financial asset that taxpayers hold," the IRS explained.
Only certain taxpayers need to submit the voluntary disclosure form to the IRS.
iStockAccording to the IRS, thousands of taxpayers have used the voluntary disclosure form since it was created in order to get into compliance with tax laws and to avoid potential criminal charges. "Those making such disclosure are still subject to civil examination and the payment of all applicable taxes, interest and penalties," the tax agency said.
When submitting Form 14457, it must be timely, accurate, and complete. And taxpayers are required to cooperate with the IRS in determining the correct tax liability and making full payment. If you are unable to make this payment in its entirety up-front, you are required to disclose this and submit a proposed payment arrangement to the IRS. "The burden is on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income, domestic and foreign, under the taxpayer's control," the tax agency explained.
To be clear, not every tax mistake will warrant a voluntary disclosure submission. "Taxpayers who did not commit any tax or tax-related crimes and wish to correct mistakes or file delinquent returns should consider other options available to comply with their tax and reporting obligations," the IRS explained. "The IRS encourages taxpayers to consult with professional tax or legal advisors in determining which option is the most appropriate."
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