May 22, 2013

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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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Are Your Tax Secrets Safe with Your Tax Attorney and Accountant?

April 26, 2013 By

How truthful are you with your taxes, especially when filing? The fact is, most taxpayers only pay and file for fear of the consequences for not abiding by the tax laws. As a result, there are some secrets they would rather take to their graves rather than share with IRS officials. But, do you really have to be so secretive about that foreign bank accounts you stash your loot from your tax attorney?

When it comes to taxes, most taxpayers are encouraged to come out clean and comply or risk penalties, interest, and even jail terms in criminal cases. This doesn’t mean that you should keep your tax attorney in the dark as well. For proper tax representation, you must learn to be truthful with your lawyer because the IRS cannot compel your attorney to share your secrets or even produce crucial financial documents. This is one of the privileges that make it easier for lawyers to represent all sorts of taxpayers, even those facing criminal charges.

What of Accountants?

Unfortunately, the accountants don’t enjoy this privilege. This means that what you share with your accountant or documents can be divulged to the IRS. This can be damaging, especially if the information or documents are very incriminating. The statutory “tax preparation” privilege that was included in IRC Section 7525 (a)(1) in 1998 doesn’t help much. This poses a huge challenge, since most taxpayers engage the services of CPAs when preparing their tax returns. How then, do you ensure that your secrets are secure?

Kovel Letter

Named after the US vs. Kovel case, your tax lawyer can hire an accountant who will do your tax accounting and even work on your tax returns but report to the attorney, not you. If this is done effectively, the attorney-client privileges are transferred to the accountant’s work, including all communications. Unfortunately, the court can compel a disclosure of communications between the lawyer and the taxpayer. If it can however, be proven that the correspondence between the lawyer and the accountant were made in confidence for the main objective of acquiring legal advice from the attorney, then a Kovel arrangement is likely to stick.

A distinction must be drawn between communications under a Kovel arrangement and the usual accounting or auditing duties. There you have it; before you divulge personal information, and maybe damaging data to an accountant, consult your lawyer and work out a Kovel arrangement. Your secret is however, secure with your attorney. For better representation, feel free to share your well kept tax secrets.

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What to Do When You Receive the Dreaded IRS Audit Notice

March 29, 2013 By

Receiving an IRS Audit Notice can make someone break out into a cold sweat, because no one looks forward to an IRS audit. However, the outcome of the impending audit will be determined by how you handle the notice. People often underestimate it and due to their lack of knowledge, end up in arms with the IRS, which can be avoided by taking the correct steps. Refer to the following when you receive the dreaded notice:

Read and Understand the Notice: You must read the IRS Audit Notice patiently and carefully. These notices carry lots of information like the year under audit, forms that will be examined, important dates, and all the contact related details. This will help you prepare for the impending audit.

Determine the Audit Location And Nature: Audits can either be correspondences requiring you to mail requested information to the audit office itself or a tax official might choose to visit your premises. In some cases, you may have to go to the audit office. In case the audits are correspondence-based, be careful enough lest you send original documents by mail; ensure that only photocopied or scanned documents are mailed. The audit officers may ask for a large number of documents and they take no responsibility if any of them are lost. You have to be very specific about what you send.

You also have the right to change the location of the audit if your tax professional lives in a different location. In fact, it is highly recommended that the audit is conducted as far away from your premises as possible.

Assess Yourself Well: Before heading out to the audit, properly assess yourself and determine whether you can handle it or not. If you are not confident enough, you will definitely need professional tax representation when dealing with the IRS. This should be determined beforehand. If you are using a tax pro, ensure that you understand him or her to avoid any form of confusion at the time of audit. The IRS may ask certain questions regarding your income as well as somewhat personal life. Your number one shield during a tax audit is your tax records and related documents, see to it that they are safely guarded because the IRS will definitely ask for proof.

The above steps are recommended will help you handle IRS tax Audit Notice effectively. However, if you are still unsure or confused about everything, understanding your rights can help you boost your confidence. Ignoring Audit notices or avoiding the IRS can be dangerous. Sometimes, proving to the IRS that you are committed to complying with their requirements may actually expedite the audit process.

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Keep Documentation of any Tax Issues that Arise

February 15, 2013 By

Every taxpayer is entitled to a copy of the tax return for personal record keeping purposes. The copy is either mailed or e-mailed to the taxpayer depending on the mode of filing; either on paper or electronically. Over 70% of taxpayers are helped by tax preparers when filing. As a result, they share IRS notices with their preparers as soon as they are received. Some tax pros promise the taxpayers that they will address any arising tax issues with the source (mostly the IRS). Unfortunately, taxpayers only realize that nothing was really done by their preparer months later upon receipt of another notice, on the same subject from the IRS.

Many taxpayers have found themselves in trouble with the IRS because of cases they entrusted their tax preparers to take care of. Following up with your tax prep on the progress of their communication with the IRS is a good habit, especially when potentially facing harsh IRS consequences. You can ask for proof of all correspondence between your tax preparer and the state authorities or the IRS.

There is nothing embarrassing about requesting for copies of any correspondences done by the tax preparer. You must never forget that the IRS will hold you responsible and you may have to pay penalties or/and interests you could have evaded.

If you are an employer and someone else handles your payroll, request for a report that what was done is exactly what you expect them to do. You don’t have to be reminded by an IRS notice or phone call to realize that all is not well with your payroll taxes. Get copies of every deposit, issued checks, 941s and 940s-print copies of all online transactions. The same applies if you are using a payroll service, make certain that indeed deposits are being made on schedule.

Taxes are important; state and federal authorities expect nothing short of perfection in filing and payment. Some due diligence with those who manage your taxes will go a long way in safeguarding you from a lot of tax-related challenges with the authorities.

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Top Five Tax Day Mistakes You Have to Avoid

January 15, 2013 By

Tax Day can be stressing, especially to the procrastinators who only remember to file their taxes on the due date. The intense last-minute pressure is a recipe to commit some avoidable mistakes, some that could trigger trouble with the IRS.
1. Failure to Meet the Deadline: Capital One’s 2012 Taxes and Savings Survey indicates that 11% of taxpayers wait until the last minute to begin filing taxes. As a result, most of them totally miss the deadline. In the event that you cannot meet the deadline, submit an IRS Form 4868, which automatically grants you a six month extension to file. Use the extension to evade penalties as well as avoid the last-minute errors on your returns.
2. Ignoring Electronic Filing: In 2012, close to 100 million taxpayers filed their returns electronically using e-file in 2012 according to the IRS. Paper filing and manual calculation are tedious and contribute to a huge chunk of tax return flaws. E-file is designed for taxpayers with an AGI of $57,000 or less. E-filers are also eligible to receive their refunds through direct deposits and the refunds can be received in less than 10 days and not weeks, as it is the case with paper filing.
3. Math Blunders: Math errors are among the most common flaws the IRS reports annually. These mistakes can best be spotted and corrected when using tax software. Electronically filed returns have less than 1% error rate as opposed to a whopping 20% mistake-rate contained on paper returns.
4. The Audit Stress: No one wants to be audited by the IRS, but there is no reason to fret at the idea. It must however, be pointed out that the IRS only audits a small number of taxpayers. With 70% of taxpayers with an AGI of $57,000 or even less, the chances of an audit are really slim. In 2011, only 1% of taxpayers earning less than $200,000 were audited, with 3% for those who earn more than $200,000, and 12% for taxpayers with income exceeding $1 million.
5. Failure to File: An estimated 7 million Americans (which translates to 5% of taxpayers) do not file their tax returns. Reasons for not filing vary, ranging from lower income that doesn’t meet the set threshold or even laziness. Some find the process tedious or complicated. The fact is, the moment you fail to file your returns, you attract serious IRS penalties. You may also be losing a lot of possible refunds. In 2008, more than $1 billion of unclaimed refunds was held by the IRS.

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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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An Increase in Tax Audit Cases: Beware!

November 21, 2012 By

Tax audits are unpleasant and many taxpayers don’t look forward to a date with the IRS. When filing tax returns, one thing that interests many taxpayers is finding out the likelihood of their returns beckoning an audit. Audits are triggered and motivated by the information contained on the tax returns at the time of filing, especially extraordinary or exaggerated deductions. In most cases, audits are placed on the wealthiest taxpayers.

Many taxpayers have expressed their dissatisfaction with the way the IRS use up a lot of resources auditing taxpayers for very simple reasons. The wealthy taxpayers face more tax issues and since they have the financial resources, the IRS usually reaps from such audits. The highly targeted and most commonly audited taxpayers earn in excess of $10 million and the IRS audited 30% of taxpayers within this income bracket in 2011. This was an 18% increase from the previous year. As a result, many high income earners have enough reasons to worry about the possibility of IRS auditors knocking on their doors.

Other highly affected taxpayers were those who made between $5 and $10 million in 2011. An increase was also recorded among taxpayers who earned between $1 million and $5 million (there were 12% as opposed to the 6.7% that faced auditors the previous year). The $500,000-$1 million earners were not spared as 5.4% were audited, increasing from 3.4% in 2010. Despite the increase in audit cases, these figures are still low and taxpayers with a 5% possibility are 95% likely to evade the IRS auditors. According to the IRS, 1.1% of individual tax returns are targeted by the IRS with the high income earner targeted most.

The listed statistics differ from the IRS Global High Wealth Industry Group, this shouldn’t be confused. The Rich Squad was launched in 2009 and focuses mostly on assets as opposed to incomes. You are likely to be scrutinized if you own assets worth $10 million or more. Auditors may first focus on the conventional Form 1040 but gradually mirror on excise taxes, gift transfers, and charitable donations-related issues.

The IRS employs a meticulous approach when auditing high income earners. They don’t leave any stone unturned, as they spread and even review family companies and gifts amongst others. To boost chances of spotting and successfully auditing large and more advanced business enterprises and individuals, the IRS uses some of the best auditors, who will demand for documentation for almost everything owned, plus incomes and expenditures. It is therefore, paramount that you keep your receipts and tax related documentation safe.

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Self Employed? – 8 Tips to Avoiding an IRS Audit

October 26, 2012 By

If you are running a small business and filing your taxes on the Schedule C of the tax return form, then you need to be aware that the IRS scrutinizes such filers and that your chances of being audited are high. You therefore, need to ensure your documentation is on point and that the information provided is on board to avoid being identified for an audit. Below are some tips that can help you to reduce your chances of an audited:
 1. Use Accounting Software
One of the ways of avoiding scrutiny by the IRS is by using accounting software to manage your accounts. Using accounting software makes you look more professional and accountable than using paper or spreadsheet accounts, as it is much harder to manipulate accounting software. If possible, use accounting software that is recognized and popular.
 2. Claim Ordinary Expenses
One of the things that will definitely raise a red flag is claiming frivolous, unrelated and uncommon expenses. The IRS has statistics and information as to the expenses and the range of expense amount for different businesses and business sizes. Therefore, if your expense claim is too high, you increase the probability of an audit. However, where such expenses are unavoidable, ensure that you have the correct documentation to support the expense.
 3. Mileage
Mileage is another area that the IRS gives more attention to. This is because it is easy to pass off personal mileage as a business expense. High mileage claim may attract the attention of the IRS auditors. Therefore, ensure that you have the support documentation for a lot of travel. Have a mileage log, an appointment book that shows where and why you travelled, and possibly some vehicle repair receipts to support your claim.
 4. Meals and Entertainment
Business meals and entertainment are yet another area that is easy to misuse. The IRS therefore, scrutinizes such expense claims. When you make such claims, ensure that it is not excessive and frivolous. You should also ensure that you claim such expenses according to the IRS rules.
 5. Business Travel
You should also be careful when claiming business travel, especially so when you combine such travel with leisure and holiday. Some destinations such as Las Vegas may attract more attention as such destinations are seen as being more vacation-like places. Therefore, ensure that you have support documentation to show business intent of the travel, such as an invite from a potential client, a trade fare that you are participating, or a business seminar that is related to your type of business.
 6. Home Office
Home office expenses are another red flag as it has times, not a clear division between home and business expenses. To claim home office expenses, you will need to show that you spend extensive time working from your home towards your business. You also need some form of justification as to the way you allot home and business expenses. Some of the support documentation includes a photograph of the work area to show proportion of space occupied by the business.
 7. Use a Professional Accountant
You can also increase your credibility with the IRS by hiring the services of a professional accountant to prepare your account reports according to professional standards.
 8. Consider Changing Business Model
You may also consider changing your business model from a self employment business reporting on the Schedule C to a Limited Liability Company (LLC) or partnership as this attracts less scrutiny and reduces chances of an audit.

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Have Your Received a Letter from the IRS?

October 24, 2012 By


Many taxpayers would wish never to receive any letter from the IRS, as they perceive such correspondences as trouble. However, the IRS sends out millions of correspondences to taxpayers every year. These letters are for all sorts of reasons ranging from acknowledgements of receipt of a payment to information about an update in your account. Many of the letters may not even require any response from you. Therefore, if you ever receive a letter from the IRS, do not be alarmed but instead, read the letter and understand its requirements. Below are tips that will help you deal with these dreaded IRS letters:
Do Not Panic

 
When you receive the letter from the IRS, do not panic or avoid the letter as many people do. Avoiding the letter could escalate an issue that could have been easy to resolve and it could easily jeopardize your credibility with the IRS. Therefore, open the letter and find out the reason for the letter.

Understand the Purpose of the Letter

There are different types of letters that the IRS sends out to taxpayers. Each letter comes with a code and a heading that should guide you as to the type of corresponds. Some of these correspondences include:
• Collection Letters – Collection letters are sent to taxpayers who owe the IRS and require settlement of the bill. If you do not have the funds to settle the bill, you can seek alternative settlement options such as an Installment Agreement or an Offer in Compromise. On the other hand, if there is a discrepancy on the bill or if you are not clear about the amount, you can seek advice and representation from a tax professional on the issue.
• Audit Letters- Audit letters are sent to inquire about some information or documentation to support amounts included in your tax return. The IRS has secondary information sources that they compare with your tax return information and if there is a discrepancy, they will send an inquiry letter.
• Information Letters – These letters are sent for information purpose and will not require a response. They update the taxpayer of information, such as an update on change in address or name of taxpayer. The IRS will also inform you of corrections that they have made on your tax return form. If you are okay with the correction, then you need not respond, but if you do not agree with the correction, you can raise a petition.
 Respond Within Timelines
For correspondences such as collection letters that require response, it is important to give the required information within the deadline. Get professional help if unsure as information you give to the tax authority may work against you. Remember, you do have a right to representation when dealing with the IRS and can get a licensed tax professional to help you sort issued with the IRS. You should also file copies of any correspondences sent out to the IRS as part of your tax documentation.

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Top Reasons for IRS Tax Audits

May 9, 2012 By

Without even the IRS knocking at your door, or sending a stern letter saying you cannot “pull a fast one this time,” tax time is already irritating enough. Nevertheless, IRS audits are to make sure everyone pays their fair share. The IRS has several measures that automatically trigger an audit and process millions of tax returns in a short time. It may not necessarily mean that you have done anything unlawful; maybe the return you filed failed to show convincingly that you are not out to defraud the IRS. If you file your return correctly, you should be able to prove that you are paying all your taxes. The IRS will have to agree with you and leave your return as such, leaving your audit without any fine, or worse, jail time.

An audit is conducted either by mail or in person with three possible outcomes:

  1. The IRS finds out the return is correct and hence it stays unchanged.
  2. The IRS finds irregularities and you agree to the changes hence pay more taxes, interest, or a penalty (maybe forfeiture of property and jail time in rare extreme cases)
  3. The IRS makes changes to the return and though you understand it, you do not agree to it. You can then appeal or enter into mediation with the IRS.

The following are some top reasons for the IRS to audit your return, how to identify if you are wrong, and what proof you will require to deter a total audit, fines, and often, humiliation:

1. Reporting Incorrect Taxable Income

Your W-2 and 1099 forms are available to both you and the IRS for both full-time and freelancer employees, so you cannot cheat about your taxable income. It is perfectly okay to cite a small math error since the IRS will correct it. It is however not okay to estimate how much you make even if you are a freelancer. To avoid this compare the 1099 you receive with your records. If it is wrong, inform your company and ask they file the correct 1099 with the IRS.

2. The Home Buyer Credit

The first-time homebuyer credit was made available to those who bought a home for the first time after April 8 2008 and before January 1 2010. This is like an interest-free loan of up to $8,000 from the government. If you claimed the credit in 2008, you pay back the loan over a period of 15years by paying an additional tax. If you took the credit in 2009 and 2010 (and 2011 for service members), you do not have to pay it back.

Some people trying to defraud the IRS have misused this credit. So the IRS will scrutinize anyone claiming this credit to exclude people who are flipping homes or speculating in real estate. They check to see if you have lived in the home for more than 36 months as per the requirements. It is okay if you bought your first home and will be living in it for a while. It is not ok if you bought your first home and sold it within three years for a profit, or made another home your primary residence. You need to pay back the credit in full when you pay your taxes that year. Always keep all records about the purchase of your home as proof of legitimacy.

3. Huge Donation on a Small Budget

The IRS will be suspicious if you make large charitable donations when you do not have much income. It is ok if you gave a generous donation to your alma mater but lost your job suddenly, thus making your income lower. It is not ok if you trying to give made up charitable deductions. Make sure you keep all charity receipts and follow IRS’s tips for charitable donations. Appraise your donations.

4. A Steak Dinner with the Clients

It is ok to deduct 50% of the cost of a reasonably priced meal where you entertained potential clients for your business. It is not ok to deduct that cost by citing travel expense. Keep all receipts and record the dates and times, descriptions of the expense, the business purpose, and business relationship.

5. Using Your Car for Business

It is ok to use the car to make minor deliveries to clients using your car, but it is not ok to drop off deposits at the bank on your way to personal errands. Keep a record of mileage and calendar entries for every time you use the car for business.

6. Your Home office

It is ok to have a study where you keep your work accessories and do majority of your work, but it is not ok to have a desk at one corner of a room where you work a few hours a week.

7. Errors

This is one of the top reasons for audits. The IRS fixes small math errors. However, claiming wrong deductions and credits, stating the wrong income and filing wrong statuses are not ok. You need to double and triple check all your returns before filing them Keep copies of your returns and records.

8. Round Numbers

Avoid having little tidy numbers since the IRS may assume you are making things up. Round of to the nearest dollar. Do not do things from memory and rounding off to the nearest $25. Have documentations for your deductions and credits, and use actual numbers on your forms.

9. A Business That Loses Money

If someone with a business reports losses for two consecutive years, the IRS have reason to look closer. It will be ok if the business did not do well for some time but you have something else generating income for you. It is not ok to show losses in a business yet you have no other source of income. You should have proper documentation for the business to prove it made a profit or loss at least three of five years.

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