May 21, 2013

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Plan for Tax Day with Proper Record Keeping

May 13, 2013 By

Most taxpayers heave a sigh of relief moments after filing their taxes, stash away related documents, look forward to their tax refunds, and wait for next year’s tax day. Though taxpayers have more than ten months to prepare for next year’s tax filing season, the majority suffer from procrastination; only remembering about tax filing a few weeks or days before the tax day. This poses the danger of missing out on important tax deductions, possible errors that could beckon an IRS audit, or even missing the tax filing deadline, which might attract hefty fines and interests.

The secret to successful tax filing lies in proper record keeping, which can best be achieved through the following three main ways:

1. What Are Your Possible Tax Deductions And Credits?

Tax payment and filing can be hectic, but they pay off if you claim tax deductions and credits you are eligible to. You must therefore, project any possible credits and deductions you are likely to be entitled for during the year. Assuming that you enroll your children to a daycare, you might qualify for a Child tax credit. Just keep an eye on your expenditures and ensure that you have the tax ID number of the childcare provider. The same applies to eligible deductions as a result of making donations to charities, use of business cars (where you have to keep track of the mileage by using a log), amongst others. You have to be informed about what will happen during the year to successfully keep necessary tax documents for easy tax filing.

2. Design a Filing System

A properly organized filing system is the gateway to stress-free tax filing. You must ensure that everything is organized by carefully labeling your files like “tax receipts” or related items. Similar documents must be filed in appropriate files, which have to be kept at an easy-to-access place like your desk or convenient drawer. In the beginning, it might appear a bit tricky and tedious, but with time, you might even start doing it without having to think about it. The same applies to tax documents like W-2s, which should be safely stored as soon as you retrieve them from your mailbox. When you finally start filing, it will be a breeze.

3. Go Digital in Record Keeping

The best way to safely keep your tax records for a very long time and for speedy future access is to store them in paperless form. This is very convenient and easy; just create a file on your computer or even in the cloud where scanned tax documents can be saved. There are some apps like the Shoeboxed that are helpful in storing digital versions of your receipts. You can even use your smartphone to capture the image of the documents and digitally file them away.

Since tax documents contain very sensitive information, taxpayers are encouraged to use passwords or encryptions. Regular back ups are also important so that you don’t lose the information. For simplified tax filing, plan in advance and keep the necessary tax documents.

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Personal Filing System: Make Your Tax Filing Simpler

May 8, 2013 By

Filing taxes is a tremendous task, especially when it comes to maintaining a proper personal filing system. The dates of purchases, the receipts of expenses, and other documents are very important for record keeping. To file a tax return that is complete in all aspects, you need all necessary documents and other proofs as they show the amount of investments and expenses you incurred within a tax period.

Also, these proofs are mandatory requirements when you have to apply for loans; failure to produce may prolong the loan processing period. Personal filing systems therefore, require a lot of preparation and organization from the individual. You may choose to keep a paperless system or simply manage all the hard copies as a file.

Proper Labeling: Before you start, ensure that you have a one letter sized pocket file expandable up to 3 inches, files, folders and the labels for the same. It is always prudent to label the primary folder and the remaining file folders appropriately as personal expenses, medical or dental bills, expenses on renovation, large purchases, utility bills, bank statements, credit card statements and receipts, investments, and tax records.

Categorize the Documents: With all documents and files labelled, organize them for the filing system. The documents may be placed in the respective folders and packed into the primary folders and safely placed in a drawer. As the days go by, you may add more receipts, pay slips and other bills into different categories. You may also include the expenses related to education, travel, and pet relocation. But ensure that you never miss a bill by chance. As soon as you make a purchase or pay a bill, file those slips right into the folders immediately.

An additional folder that draws your attention on unpaid bills can be labelled as “bills to pay” that ensures you pay your outstanding bills on time. Similarly, a folder with a label as “Needs attention” will help you sort out any abnormal or suspicious bills, as in case of credit card, for example.

File Daily: Daily filing is a smart choice as it helps you to keep all the folders up to date without missing any receipts or bills scattered here and there. Make it a habit to check mail regularly and place the bills in the “bills to pay” folder and receipts in a proper folder as labelled. Any bills that are overcharged or misappropriated may be placed in the “Needs attention” file and sorted out quickly.

Time Factor: When you have documented properly the next question that arises is the duration in which the document will be preserved. The IRS requires that you keep the records for at least 3 years. In other cases, IRS may ask you to keep them for additional 3 years. So, preserve the files for about six years.

Some of the documents that have to be stored for 6 years are; documents for tax deduction, brokerage statements for tax returns, records of selling a house or property and records of expenses and incomes reported for small business as reported on tax returns.

Some other documents may be kept for a life time, such as tax returns, property deeds, closing statements, life insurance policies, property deeds, life insurance policies, estate related documents etc. You may discard the less important bills such as cable bill receipts, ATM receipts, bank deposit slips, pay check stubs etc.

Keeping all the documents in an organized fashion, you can make use of a clutter-free personal filing system that will at the end of the year, help you pay taxes and reap other benefits. In case any of the tax documents is lost or misplaced, make an effort to obtain a copy.

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IRS Announces Three-Month Filing, Payment Extension Following Boston Marathon Explosions

April 17, 2013 By
WASHINGTON — The Internal Revenue Service today announced a three-month tax filing and payment extension to Boston area taxpayers and others affected by Monday’s explosions.
 
This relief applies to all individual taxpayers who live in Suffolk County, Mass., including the city of Boston. It also includes victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax preparers were adversely affected.
 
“Our hearts go out to the people affected by this tragic event,” said IRS Acting Commissioner Steven T. Miller. “We want victims and others affected by this terrible tragedy to have the time they need to finish their individual tax returns.”
 
Under the relief announced today, the IRS will issue a notice giving eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013. By law, interest, currently at the annual rate of 3 percent compounded daily, will still apply to any payments made after the April deadline.
 
The IRS will automatically provide this extension to anyone living in Suffolk County. If you live in Suffolk County, no further action is necessary by taxpayers to obtain this relief. However, eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, and identifying themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated.
 
Eligible taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing Form 4868 by July 15, 2013.
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Tax Filing Mistakes You Must Avoid

April 12, 2013 By

Tax filing can be not only tedious, but a bit intimidating. Yes, most people are fearful of complete their returns for fear of committing tax mistakes during the process. The IRS tax consequences of some mistakes have been blown out of proportion, with taxpayers claiming to receive streams of nasty letters, penalties and even audit threats.  Relax; things are not as bad as many people believe and the IRS is not so insensitive (at least sometimes). Some mistakes like math errors are automatically corrected by the IRS officers and other than a routine notification about the alterations, there is absolutely nothing to worry about.

However, this doesn’t mean that you should be careless when filing your IRS Form 1040s (the 1040A or 1040EZ). All it takes to file accurately is proper prior planning and avoiding last minute rushes. Here are common tax mistakes to avoid:

1. Math Errors: This is the most common tax filling error even though subtraction, addition, and multiplication errors have been on the decline in the recent past, thanks to tax preparation software. Every amount you enter into the forms must be triple checked, as a wrong entry can be spread across the whole return by the software.

2. Wrong Social Security Numbers: Ensure that you fill in the nine-digit correct SSN numbers for the tax software to capture your data. Returns with false Social Security Numbers will automatically be rejected and this means that you cannot claim deductions and credits you might be entitled to, especially those related to dependents.

3. Wrong Form 1040: You don’t have to fear the complex and multiple-page forms and opt for simple ones like the IRS Form 1040EZ. You will realize that using the 1040A and 1040 grants more tax breaks, even though they have some intricate, but manageable complexities.

4. Dependents: Before claiming any dependent-related tax deductions, ensure that they qualify. These requirements differ and you must therefore, read and understand the eligibility criteria of every specific case before claiming.

5. Erroneous Methods of Deduction: Deductions are bound change; you might be claiming standard deductions and yet, you qualify for itemized deductions due to some changes in your life. If you bought a home or incurred a huge medical bill, you sure will want to itemize your deductions.

6. The Filing Status: Did you get married or divorced during the year or took custody of a child? Accurate filing status like Head of Household will entitle you to some tax advantages and deductions. 

7. Ignored Income: Other than employment, did you earn some other income say from investments or side jobs? Salaried taxpayers are less likely to commit this mistake because of the W-2 withholding, but if you have any other source of income, remember to include it on your return, lest you receive a 1099 reminding you about the unreported income.  

Other common errors include failing to deduct charitable donations and missing other important tax credits. Finally, you must give accurate account and routing numbers for direct deposit refunds from the IRS. When filing, take your time and don’t rush to avoid these mistakes and to avoid overlooking potential tax breaks. If your tax is handled by a tax pro, it is safe to still review the return because you will be held liable for any mistakes. The same rule applies to joint filers; you are signatory to the return and therefore, directly liable for its content.

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Legal Settlements and IRS Taxation

March 25, 2013 By

After the legal settlement of a dispute, the winner may be entitled to some monetary compensation or damages. What worries most taxpayers is whether the amount they are entitled to is taxable or not. In most cases, this amount is taxable, but the permissibility for tax deductions varies. The extent of the variations can be determined through the following ways:

·         Process of damage

·         Resolution of the case (nature)

·         Issuance of checks and IRS Form 1099

The way your settlement is taxed also depends upon the origin of the dispute. For instance, if you were fired from a company and successful get an amount based on discrimination or molestation charges, the tax deduction procedure will be similar to that of an employee of that company. Considering a situation where you have filed against a competing company for some lost profits, then the settlement would be taxable under the assumption that they are your profits. But in case these settlements are as result of some physical damages or any form of health related injuries are involved, the settlement is non-taxable.

For cases involving emotional distress as a result of a physical injury, the payment is non-taxable. There may be some companies that torment their employees and torture them psychologically. Many times, the mental torture affects these employees physically. It has been noted that most people end up depressed or even suffer heart attacks as a result of workplace harassment. In such cases, the settlement may also be exempted from taxation. This has been done to ensure that people get the most out of their settlements that should be used to rebuild their lives.

As much as the IRS is well known for its numerous collection tactics, some that are rather crude, it also offers proper settlements and your rights will be respected and safeguarded. Many times, people suffer physical sickness from their offices in situations that result in deteriorating mental and physical health. Such taxpayers can enjoy a large percent of tax free settlement that might exceed the distress settlements.

All you have to focus upon is a proper tax settlement. A little knowledge about tax terminologies will help you out and boost your chances of getting a better tax settlement. The IRS definitely gets a share of most of the legal settlements, but it also strives a lot to ensure that the taxpayers’ rights are not violated. In establishing physical and mental health statuses or injuries, consult a doctor early enough and remember to keep the records.

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Should You or Should You Not Amend Tax Returns?

March 18, 2013 By

The IRS allows taxpayers who discover errors on their tax returns after filing to amend such returns. But before making the amendments, there are some important considerations the IRS would like you to keep in mind.

The main reasons you may have to revise your tax return include incorrect or omitted filing status, number of dependents, total income, tax credits, and tax deductions.  Other reasons are contained in the instructions.

Amending tax returns may perhaps not be compulsory, as there are times when you really may not have to. Simple math errors are automatically corrected by the IRS; you therefore, don’t have to make amendments. Other instances include when requesting for missing forms like the W-2 or schedules during tax processing.

Use the IRS Form 1040X-Amended U.S. Individual Income Tax Return to revise the IRS Forms 1040A, 1040, 1040NR, 1040EZ, or 1040NR-EZ. Make certain that the tax year return you are revising is accordingly marked on the 1040X. Note: You cannot file an amended tax return electronically, it has to be done manually and mailed.

In case you are amending returns for more than one year, use separate Form 1040Xs for each return. Put every one of the amended returns in a separate envelope and mail them separately to the proper IRS tax return processing center. Refer to the instructions on the 1040X to find out where to mail them.

The IRS Form 1040X has three columns; column A indicates the figures as they appeared in the original tax return, column B is used to show the changes you make and column C shows the corrected figures. Behind the form is a section that explains the particular changes and why they should be changed.

If any of the changes affect other forms or schedules, make certain that the affected forms are attached to the 1040X. Failure to do this may possibly holdup the processing of your tax return. If the amendment you are making is for additional tax refund, just wait for the original refund before going ahead with the amendments; cash the check and wait for the extra refund. Remember that you have to make amendments within three years from the date the original tax return was filed or two years from the date the tax was paid, either that is later to claim any refund.

Finally, amended taxes are normally processed in between 8 to 12 weeks. Before amending the tax return, you may want consult with your tax professional on the best thing to do.

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Filing IRS Back Tax Returns

January 23, 2013 By

The rush to file back year taxes is common, especially during the annual tax filing season in April. This is the time many remember they failed to file returns for a number of years. The main reason you have to file your back years’ returns is obvious; avoiding the steep IRS penalties and interests. To catch up on your returns, there are a few things that you need to bear in mind.

If you are seeking the help of a tax expert, it is important that you share all the income and expenses information for the year in question. In most cases, the W-2, 1099’s, and other related tax forms are required, as they guide the preparer through the filing process. If by any chance you don’t have the relevant documentations, you can always request for your wage and income transcripts from the IRS.

The tax preparer can also request the same on your behalf with a signed Power of the Attorney, Form 2848. The taxpayer must however, determine the Schedule A deduction amount plus the business’s income and expenditures.

The IRS can provide the 1099s and 1098s, but the tax preparer must see the last filed return, especially if they are filing back taxes for multiple years. It is always prudent to start with the oldest return, as there is some info that may be carried forward to the following year. The returns should be mailed, since most of them were filed on paper.

If you were eligible for tax refunds, it is unfortunate, because you may not be able to claim them it if you waited too long to file. Normally, you are required to file within three years from the tax return due date. Even though you can still file the returns after the three years, you will not be eligible for the refunds. On the other hand, if you have any balance due, you should prepare yourself to pay the amount owed, plus interests as well as IRS penalties.

Many taxpayers assume they don’t have to file, so long as they haven’t received any formal correspondence from the IRS. This is very misleading, as the IRS believes it is an obligation for every taxpayer to file returns annually without having to send a reminder. Furthermore, if you want to enter an Installment Agreement or an Offer in Compromise, you have to get all the necessary returns filed to qualify. The best time to catch up on your back taxes is during summer, when tax agencies are not as busy. If you have unfiled taxes, talk to a tax professional for assistance and file all your back tax returns before the IRS comes knocking.

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Understanding the IRS Statute of Limitations

January 3, 2013 By

There are numerous tax offenses that taxpayers commit every year. Even though some may be committed unconsciously, most of these crimes are perpetrates on purpose, aimed at lowering the tax burden. Some individuals choose to conceal some income from the IRS or opt to deduct personal expenditures as business expenses. Others miss the tax filing deadline and even opt not to file at all. In all these situations, the most common question that taxpayers feel pressured to find answers to is: when is it right to breathe easy and stopping worrying about being caught by the IRS?

The answer to this question varies, based on the situation and the statute of limitations. For various civil tax cases, like exaggerating an entertainment-expense deduction, the statute of limitation normally takes three years from the tax return due date or the actual date of tax filing; whichever comes later. There are however, some exceptions to the rule: if the tax issue involves more than a quarter (25%) of the Adjusted Gross Income, the statute is extended to six years and applies to unreported income.

There is no statute of limitation for civil fraud, but the IRS finds it hard to prove it. The statute only commences after the return is filed and applies to some forms, even if the return was filed. The affected forms include Form 3520- Foreign Trusts and Gifts, Form 5471-Controlled Foreign Corporations, Form 8621-Passive Foreign Investment Companies, and Form 8886-Reportable Transactions. The IRS is usually interested in these forms for various reasons.

If a taxpayer leaves the country for a period exceeding six months or declares bankruptcy, the statute of limitations is halted. The former has proven to be challenging, especially to taxpayers who live abroad and have not filed foreign financial-account reports for some time. It is however, every taxpayer’s responsibility to remain tax complaint at all times (or risks the tax consequences).

Unlike civil cases, criminal tax issues have a statute of limitation of six years but conspiracy charges can extend this period beyond that. It is however, rare for cases to run beyond six to eight years due to lack of enough records that make it hard to prove. It can also be extended if an audit is underway. It is very unlikely that a return will be picked after two years of filing. However, huge tax sins tend to stalk taxpayers longer and culprits have to be ready for dire outcomes at any time.

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Five Tips for Amending and Filing Tax Returns

December 21, 2012 By

There are different circumstances when you may be forced to amend your tax returns, like when you forget to report some income on the IRS Form 1040 or receive an amended Form 1099 or K-1. Whatever the case may be, bear in mind the following and crucial tax tips:

1. You are Not Obliged to File Amended Returns: As surprising as this might be, it is not mandatory that you file amended returns. The moment the IRS systems matches the amended Form 1099 or K-1 against your Form 1040, it can send a bill based on the details captured. It is always recommended that you find out from the IRS if the originally filed return was accurate at the time of filing. If it was, then you actually don’t have to file the amended return. If however, there were some discrepancies at the time of filing, you should make the corrections and file the amended return as soon as possible before the IRS spots the flaw and comes after you.

2. Not All Errors Must be Amended: There are some errors, like wrong calculations that can be corrected by the IRS and therefore, you don’t have to amend the return. You will also not find it necessary to amend the return on realization that Form W-2 was omitted or you forgot to attach schedules and related mistakes. This is because the return can still be processed without them. Some parts of the original return cannot be changed by the amended return like filing status from married filing jointly to married but separate filing.

3. No Cherry-Picking: As much as filing amended returns is not mandatory, you have to correct everything the moment you choose to. It is not possible to alter areas that increase your refunds and ignore those that increase your tax obligations.

4. Proper Timing is Crucial: Form 1040X- Amended U.S. Individual Income Tax Return must be filed in not more than three years from the time the original returns were filed or two years from the tax payment date; whichever is later. It is however, recommended that you file amended returns as soon as possible. If you want to claim more refunds, be patient until the original refunds have been paid, then go ahead and file 1040X.

5. Strictly Paper Filing Required: Amended returns are strictly filed on paper (Form 1040X) even in situations when the original return was electronically filed.

Conclusion:  Are you considering filing amended returns? Ensure that you understand the listed factors and make the right decision.

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The History and Story Behind the April 15th Tax Date

December 13, 2012 By

The annual tax filing deadline has always been April 15th, at least for as long as most current taxpayers can remember. But whenever this date falls on either a Saturday, Sunday, or a federal holiday, the deadline is pushed to the next business day. This means that if April 15th lands on a Saturday, you have the whole weekend to review your returns and file by the set deadline.

In 2012, April 15th was on a Sunday and taxpayers could have filed their returns by the following day, Monday 16. But luck was still in favor of procrastinators. Monday was also a holiday in the District of Columbia, Emancipation Day. This was good news, as a federal statute enacted many years ago automatically makes holidays observed in the District, nationwide. Since the Tax Day was coinciding with this holiday, as was the case in 2007 and 2011, the deadline for filing was further pushed to the following business day which was Tuesday the 17th April.

This however, doesn’t change the April 15th Tax Day for future years. Have you ever wondered how someone singled out April 15th and made it America’s most loathed day of the year? Initially, tax filing deadline used to be March 1st, which was established on the ratification of the 16th Amendment on Feb 3, 1913. This is the Amendment that authorized the income tax.

To ensure that taxpayers got used to the new and somehow “annoying” income tax idea, Congress chose to grant taxpayers a whole year and a few weeks. On the enactment of the Revenue Act in 1918, the deadline was moved to March 15th through a provision in the law. It was in 1955 when the current April 15th tax filing deadline was enforced through yet, another revision of the tax code. Ever since, the day has been the most stressful and disliked day of the year to many taxpayers.

Coming to think of it, this wasn’t such a bad idea after all. Stashing the Tax Day deep in the calendar year provided the IRS with sufficient time to work on tax returns. Another reason for the April 15th date is attributed to the fact that more middle class Americans were in their mid-50s then, and government was required to issue more refunds. This meant that the government could hold on the money for as long as possible. What a smart move it was, and to date, every taxpayer dislikes the Tax Date like a plague, only that it cannot be evaded.

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