Accidental Income Trap: What Is It and How Do You Avoid It

When the Internal Revenue Service (IRS) comes into the scene and examines your books, it can put any taxpayer in a nervous state. While many people can garner the IRS’s attention for honest mistakes, there are certain blunders in the auditing process that are best avoided in the first place. 

One of the worst mistakes you can make is forgetting how to report income, which often happens due to the following reasons: 

Constructive Receipt Trap 

People have the right to payment of income and all that requires tax payments even if you haven’t received the payment yet. For example, a project sends you a check in December, but you plan on claiming it later in January. This means you have to submit a constructive receipt since it’s a taxable income, no matter how long you plan on getting the payment. 

The only exception to this rule is if the person sending the payment agrees to delay to meet your preferred payment. However, it’s not a hard rule you should follow since the IRS is only lenient in these matters but not necessarily forgiving in every case. 

Cancellation of Debt Income 

Canceling debts may seem like a wonderful thing, and it is, but keep in mind that they are still taxable. So whether your debt was canceled, forgiven, or discharged, then you may receive a Form 1099-C, Cancellation of Debt, which contains all the relevant information about the cancellation of your debt income.

Keep in mind that even if you did not receive recent payments from your employer, the IRS might see otherwise in their systems if part of your debt was forgiven. There are always exceptions to certain rules, and in this case, forgiving your debt won’t trigger taxable income if it happened while you were insolvent. 

You likely won’t be liable if the debt you owed was a business purpose debt, so the IRS won’t personally hold you accountable. 

Phantom Income from Partnerships, LLCs, and S Corporations 

Receiving phantom income from the company’s list of partnerships and other corporate entities can make filing income tax more complicated, but the confusion often stems from them being non-taxable. But since the owners are taxed, you still have to submit the income tax even if you haven’t received the payment yet, or else the IRS may find something amiss in your report.

The Bottom Line: Working with Tax Specialists to Solve Your IRS Tax Problems

Filing taxes is one of the most complex responsibilities working adults face, but settling matters with the IRS is a different ballpark altogether. The list above explores just some of the many reasons people forget to report their income, which can lead to the IRS knocking at your door. 

Working with a tax specialist should keep you from falling into these accidental income traps and ensure you stay compliant with your duties as a tax-payer. 

Are You Looking for a Tax Resolution Specialist in Birmingham, USA?

Taxes are a bane of existence for all tax-payers, but you no longer have to worry about tax problems with the help of our tax professionals at Axiom Tax Resolution Group. We can help provide you with tax relief services and provide tailor-made solutions to your issues with the IRS. Get in touch with us at (1-844-882-9776) to request a consultation!