Both tax credits and deductions can lower a taxpayer’s liability, but in different ways. Tax deductions are expenses that you can claim on your return to lower your taxable income. For example, you can deduct the expenses you had for medical and dental treatment from your total income, which reduces your total taxable income. Tax credits, on the other hand, lower the total taxes due. If you qualify for the Earned Income Tax Credit, for instance, you can get a reduction in your taxes based on your number of dependents.
Taxpayers can claim both tax credits and deductions, but you must ensure that you meet all eligibility criteria for anything claimed on your return. Claiming credits and deductions that you do not qualify for may cause the IRS to make corrections, which may lead to tax debt. If the corrections lead to a tax debt, then the you are required to pay the amount due immediately. Upon non-payment, the IRS begins to treat it as tax debt, charging penalties and interest.
When the IRS processes a return, it matches information from past returns and third-parties to verify accuracy. If it finds that one or more credits and/or deductions are falsely claimed, it will make corrections in the return and inform you about it. You may receive Notice CP18, CP19 or CP20 to inform you about the error and its impact on your taxes. If the IRS finds that there is a likelihood that the errors may have been made intentionally to lower taxes, then they may order an audit.
If you qualify for a credit and you made simple errors or miscalculations, the IRS corrects those errors and informs you about it by sending you a notice. Even if the error does not lead to an increase or reduction in taxes, they will still send a notice with the information. Upon receiving notices about the owing of taxes due, taxpayers must make immediate efforts to resolve it either by paying it in full or qualifying for a payment plan.