Tax Debt Help – Made a mistake? Form 1040X can save the day!
This is another great article from “Don’t Mess With Taxes” blogsite and certainly worth restating for the coming tax filing year………………….
Uh-oh! You were slipping that W-2 copy into the drawer when it caught your eye.
How could you have missed that when you did your final filing review and dropped your return in the mail? What can you do about it now?
As it turns out, plenty.
The complexity of the tax code, coupled with the frantic lives most of us lead, means that there is ample opportunity for tax-filing mistakes. Sometimes the mistakes could cost you, like forgetting to include income earned on an investment account. Other times it might lower your tax bill, such as when you run across a forgotten receipt for a generous charitable contribution you made.
Either way, the Internal Revenue Service provides second chances to get your tax return right with Form 1040X.
This X-file is normal
There’s nothing supernatural about this X-file.
For a tax form, the 1040X is pretty easy to complete. Basically, the IRS wants to know what you originally reported, what your corrected numbers are and why you are making the changes.
There’s also a section for adding or subtracting personal exemptions in case there was some confusion as to whether you properly counted someone as a dependent.
And, in most cases, you can change your filing status, which could get you a bigger refund. For example, a new divorcee filed this year as a single taxpayer. But that cost her some tax money because she’s got custody of the kids. She should have filed as a head of household, which would have provided her with a larger standard deduction.
These are the kind of things you most definitely should correct with a 1040X, say tax experts.
When the IRS benefits
Taxpayers also should be diligent about correcting their returns even if it means they end up paying a bit more in taxes.
Why? Because it’s a pretty safe bet that the IRS is going to discover your error eventually.
If it’s a simple addition or subtraction mistake, there’s no need to amend the return. The IRS says its computers will detect the error, notify you and adjust your return automatically.
But if it’s something bigger — you overlooked a Form 1099 for $1,500 you got from a freelance house painting job — and you catch and correct it first, it could save you from paying even more to the IRS.
The IRS may not penalize you for this honest mistake, but it sure will collect some interest on the proper amount you didn’t pay on time in the first place. The sooner you correct the error, the less interest you’ll face.
“We had one preparer who filed a client’s return,” explains Brenda Schafer, senior tax research coordinator for H&R Block, “and then the employer informed the person that he would be getting a corrected W-2, so it had to be re-filed.
“You just want to be sure you have a correct return,” she says, “whether it’s in your favor or not.”
Year-round amended filing season
Such corrections are a year-round occurrence, but tax professionals say the need to amend a return often is discovered during the following year’s filing season.
“Sometimes when you’re having next year’s return prepared,” notes Schafer, “the professional says, ‘Oh, you didn’t tell me about that last time.’”
Then there’s the case where a little more knowledge can mean more tax filing work.
“We’ve had people take income tax courses to help them do their own returns and pick up items where they could or should amend a return,” Schafer says.
Amending time limits
But don’t go searching through old files for ancient tax returns in the hopes of possibly eking out a few more refund dollars.
The IRS generally gives taxpayers three years after the original return’s filing date to make any changes with a Form 1040X. If you filed early, you get three years from the return’s due date to correct any errors.
Your window to amend closes a bit if you didn’t pay all the tax you owed when you filed. In this case, you must revise your return within two years of the day that you finally paid your full bill to Uncle Sam. If, however, the two-years-since-payment date arrives after the standard three-year time limit, the IRS says you can amend your return using the deadline that comes later. Similarly, if you paid your taxes late, but not that late, and the three-year grace period provides you more revision time, you can use it.
And don’t automatically reject filing an amended return out of fear of inviting an IRS audit. Sure, the IRS will take a close look at an amended return that’s netting you a refund. And that means tax agents could conceivably look at your original tax paperwork in the process.
So why, ask hesitant amended filers, should they invite the extra attention, especially if they file just within the three-year amendment limit — the same time period after which the original 1040 would be off the tax examination radar?
“An amended return might just draw attention to a return,” acknowledges Schafer. “But, really, people shouldn’t be concerned. The main thing with tax filing is to get it right.”
And that means getting it right any time.
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – That 1040 Won’t Bite You!
Admit it. You’re afraid of your 1040. That’s OK. A lot of us are. And our tax fears, sometimes irrational, sometimes warranted, cause us to do a lot of dumb things when it comes to our annual returns.
Some people put off filing, some don’t file at all. But fear doesn’t have to paralyze you. Here are seven common tax terrors, how real they are (or aren’t) and how you can overcome them.
1. Afraid I can’t do my taxes myself
This fear, unfortunately, is too often true. And it gets truer every year as federal lawmakers add provisions and pages year after year. The tax law publisher CCH Inc. notes that the 1913 tax code took up 400 pages in its “Standard Federal Tax Reporter.” By 2007, CCH filled more than 67,000 pages of that document with tax law intricacies.
The law is very complicated and filling out the returns is somewhat mind-boggling. The media keeps telling everyone how difficult it is and people just get panicky. They sit down and start (the filing process) with all this in the back of their minds. I can understand why people would be afraid to do it.
Such fear is nothing to be embarrassed about. If you ask congressmen who actually wrote the laws, many don’t do their own returns. They’re writing policy, not looking at it from an accounting point of view.
The way our tax system works also adds to this fear.
Many people aren’t good with numbers, then once a year they wind up trying to deal with numbers. Any other time you spend money, before you walk out you have someone there telling you what you owe. But when you’re doing your taxes, you’re doing it yourself. You’re telling the government what you owe them.
The remedy: Don’t be afraid to ask for help. You have lots of preparer options, from a personal accountant who can fill out your return and help you plan throughout the year to franchise operations that gear up between Jan. 1 and mid-April. If your tax situation is not overly complicated, computer software might be enough to help you file with a bit more confidence. Take a look at your tax needs, then find the tax assistance that best meets them.
2. Afraid I’ll overlook a tax break
Even folks who are brave enough to tackle their taxes on their own often face this fear. Again, it’s not an unreasonable one. And once again, those folks in Washington, D.C., feed this fear.
Take, for example, three popular tax breaks that expired, only to be brought back to life at the end of 2006. This caused a lot of nightmares not just for us filers, but also for the Internal Revenue Service. The tax agency had already printed 2006 tax forms without the state sales tax, educators’ expenses, or tuition and fees deductions. It’s hard enough to claim tax breaks when they’re right in front of you; now with these three, you have to go searching for how to claim them.
The remedy: Accept that tax filing is going to take some homework. Before you start your return, check out the countless publications — so you’ll know exactly where this year’s taxes might trip you up. Again, you also can turn to software or a tax pro for help in claiming all your possible tax breaks.
3. Afraid I’ll make a mistake that will cost me money
This is a close relative of fear No. 2. But here, the fear is not of omission, but commission. This includes things as simple as filing the wrong tax form. It happens. In trying to get through filing as quickly as possible, some folks opt for the easy, in this case, the 1040EZ, way out and end up cheating themselves. Or they choose the incorrect filing status, such as single when they’re eligible to file as the more tax-advantageous head of household. Those are just a couple of the many mistakes that filers make ever year.
The remedy: Slow down. Even if you’ve waited this long to do your taxes, you still have time to do it right. Read the instructions. If you’re using software, don’t skip steps just to finish. Answer all your tax pro’s questions. If he or she says to provide more information, then provide it. A little extra work and attention to detail could cut your tax bill or get you a bigger refund.
4. Afraid that my tax adviser is incompetent or a crook
You know you need help, but you’re afraid that the person you turn to could be more of a hindrance. Unfortunately, sometimes this fear is well-founded.Last year, the Government Accountability Office issued a report with the disturbing finding that in a limited study of commercial tax prep chains in major metropolitan areas, all the returns completed in those offices were wrong to some degree.On April 3, the IRS alleged that some Jackson Hewitt franchises filed bogus returns for clients, cheating the federal government out of $70 million. The agency obtained court orders to shut down 125 branch offices in Detroit, Atlanta, Chicago and Raleigh, N.C.Even big name, high-dollar help sometimes produces unexpected tax costs. Remember KPMG? A few years ago that global accounting and consulting firm acknowledged that some of its tax shelters didn’t meet IRS standards and agreed to pay the government millions to settle the inquiry.By the way, the taxpayers who participated in those companies’ questionable shelters ended up owing additional taxes and penalties.
The remedy: Everybody makes mistakes, even tax professionals. The key is to make sure you don’t end up paying for your tax preparer’s mistakes. Start with the hiring process. Investigate several potential preparers and thoroughly check out each before you hand over your personal tax documents. Once you’re a client, don’t take every recommendation at face value. Ask questions and make sure you understand the answers. Most of all, remember the adage “if it sounds too good to be true, it probably is.” There are some tell-tale signs that a tax shelter is in fact a tax scheme that could cost you dearly.
5. Afraid I’ll get audited
If fear No. 4 comes true, then this is definitely one to be scared of. Audit fears, however, tend to be much greater than actual audit realities. True, there are some red flags that might catch an IRS examiner’s eye. But overall, the risk of audit is small — about 1 percent of individual returns were audited in 2006. So don’t let fear of IRS questions keep you from filing. And definitely don’t let it stop you from claiming legitimate tax breaks.“If you’re really doing stupid things on your tax return, expect to get audited. Deservedly so,” says Enrolled Agent Eva Rosenberg, who is based in Southern California and the Internet’s Tax Mama. “But if you’re afraid to use a legitimate tax break because you’re afraid you’re going to be audited, stop it! Stand up for your rights. There’s no reason to be afraid.”
The remedy: Make sure you can show an IRS examiner why you filed as you did. This means keeping good records, especially if you’re self-employed. People who work for themselves and file Schedule C with their returns tend to get scrutinized a bit more, so your business record keeping needs to be more precise.
6. Afraid to e-file because my personal info could be lost or stolen
Slightly more than half of us send in our returns electronically. But that leaves another 60 million, give or take a million, folks who still file the old-fashioned paper way. This fear is one of the contributors to that mind-set.Yes, identity theft is a major issue. In fact, as this tax-filing season entered its last few weeks, the IRS issued a new warning about e-mail phishing scams that falsely claim to be from the tax agency. And yes, hackers still manage to break into online financial data systems periodically. The biggest problem the IRS has had in recent years, though, has been with such information left on laptop computers that were lost or stolen, not with someone compromising the government’s online tax database. But that doesn’t mean you should ignore Internet safety precautions.
The remedy: Any tax data transference requires two parties. Make sure the starting point of such a relay, your computer, is secure. This means installing a firewall and virus protection, either as software or a hardware barrier, and then updating it regularly. Of course, taxpayers still must trust the IRS to safely store our data, but at least e-filers can know they did their part in the security process.You don’t need any fancy software to back up your data. You can just copy the files the same way you copy other material, send it from ‘my docs’ to a CD or USB drive. There’s no reason that a computer or data loss should cause filing problems. The IRS doesn’t really accept that as an excuse for a late or no return.
7. Afraid to file because I can’t pay
The only thing scarier than filing taxes is what could happen if you don’t file. The IRS penalty for not filing is actually worse than if you file but don’t pay your tax bill in full.If you owe tax and don’t file on time, the late-filing penalty is usually 4.5 percent of the tax owed for each month, or part of a month, that your return is late. However, if you file on time but just can’t pay your tax bill then, you’ll generally face a late-payment penalty of only one-half of 1 percent of the tax owed for each month, or part of a month, that the tax remains unpaid. The total non-filing and non-payment penalties could reach a cumulative 25 percent maximum penalty. But if you file your forms on time and then make arrangements to pay, you can avoid taking that hardest tax penalty hit.
The remedy: File! And file on time. If you can’t afford to pay your full tax bill, send Uncle Sam at least a down payment. Even sending in an extension request with a nominal payment is better than not filing at all. Then worry about coming up with the cash. “Never, never, never don’t file! There’s no reason to put yourself in that position. File the return and establish a plan to deal with the consequences of not having the money.You have several payment options. Use a credit card to meet your tax debt then pay it off as quickly as possible. Go with the card that has the lowest interest rate or a zero-percent rate one if possible. The IRS also has payment plans. Though these add interest charges to your tax bill, at least you can be assured that you’re meeting your filing and payment obligations.
Face your tax fears early
By now, you should be a little less anxious about that impending return. And by taking a few steps now, you should be able to completely overcome most of these fears by the time your next return is due.Look at what caused your heart to race and your palms to sweat this filing season. With those fears fresh in your mind, map out a strategy to overcome them, starting now.Trying to pull things together at the end of year when you’re not organized during the year is not a good idea. You need to plan throughout the year, not in April.That way, when next tax season rolls around, fear won’t be a factor.
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – Get Your Taxes Done In A Week!
Taxes are like dust on a table. It always seems to show up and just sit there. No one wants anything to do with it, except maybe to write their name in it. And the longer it sits, the deeper it gets.
Completing your tax return can be a big job, but you don’t have to tackle it all at once. By spreading out the task, you can save your sanity and maybe a little tax money, too, since you’ll be more able to look for ways to cut your final bill.
Get taxes done in a weekHere’s how to get your taxes done in one week by spending just about an hour a day.
7-day tax-filing plan:
Day 1 Gather data.
Day 2 Reduce taxable income.
Day 3 Find your forms.
Day 4 Fill out your forms.
Day 5 Take a break.
Day 6 Check your work.
Day 7 Sign, seal and deliver.
Day 1: Gather data
Gather all your income data. It is, after all, called an income tax.
Find all your W-2 wage statements, any 1099-MISC forms if you did independent contract work and all the statements detailing just how much your savings and investments earned. If you sold a stock or other property, you’ll need those data, too.
Did you win the lottery? Obviously not the big jackpot or you would’ve hired someone else to worry about this now! But any amounts you win are taxable.
And if you’re enjoying your retirement, you may owe a part of those monthly pension checks to Uncle Sam.
Even if last year was a tough one financially, you may have some tax consequences. If you were out of work for a while and collected unemployment, those payments are taxable, and you should have received a Form 1099-G showing the amount.
Find all these income statements, clip them together and you’re done for the day. See you tomorrow!
Day 2: Reduce taxable income
Welcome back. Day two probably will be the fullest of our tax-filing plan, but it’s worth it.
Today we start slashing your tax bill.
Pull together all your exemption, deduction and tax credit info. These items will help you whittle down your income to the actual amount that the Internal Revenue Service will tax.You get to take $3,300 off the top for each person you claim as an exemption on your return. That’s generally a pretty easy determination: you, your spouse and any dependents, which generally means your kids. But did you care for a parent, even one who didn’t live in your home? You may be able to claim an exemption for that person, too.
Next, there are some expenses that any taxpayer can take without bothering with extra paperwork. These include certain IRA contributions, student loan interest, alimony payments or moving costs. Collect the backup for these non-itemizing expenses first.
Now check the standard deduction allowed for your filing status. Most taxpayers use this rather than bothering with tracking every expense to itemize. If the standard amount works for you, great! You may be through today in less than an hour.
But if you find itemizing will help cut your taxes, you’ve got a bit more work to do.
If you’re a homeowner, find the mortgage and property tax statement from your lender. In many cases, these amounts alone exceed the standard deduction. Don’t forget that you can also deduct any state and local taxes, so you’ll need the documentation of these payments.Philanthropic filers get a break, too. Your qualified cash and property donations can reduce your tax bill. Make sure you have an official receipt for any charitable gifts that were $250 or more.
Next, pull out your medical records for last year to see if your costs total 7.5 percent of your income. If they do, you can use them. If not, don’t waste any more time here.
And don’t overlook miscellaneous deductions. This amount has to total 2 percent of your income, but there are a lot of expenses you can include here – un-reimbursed employee business expenses, investment costs, even tax preparation fees.
If you’re self-employed, track down all receipts and documentation for any number of business-related expenses. This includes the mileage records you kept when using your car for business, the office equipment and supplies you bought, and the utility bills you paid to keep the home-office lights burning.
Now to the credits. These breaks can help cut your tax bill dollar for dollar.
If you didn’t make much, you may be eligible for the earned income tax credit. The break could be even larger if you have kids.
Even if you don’t qualify for the earned income credit, you may be eligible to take $1,000 per child off your tax bill. If you paid a nursery school to watch them while you worked, part of that cost may cut your taxes. Pull child care records for the exact amount you spent.
Credits also are available for some educational costs — yours and your children’s. You’ll need these details. And there’s even a credit to cover some adoption expenses.
Once you’ve found all this material, stack it next to your income info. You’re finally through for the day.
Day 3: Find your forms
Now that you know what you made and how you can reduce it to a more tolerable taxable level, find the forms you’ll need to file.
The IRS offers three individual tax return forms: the 1040EZ, 1040A and 1040. Each has specific requirements you have to meet to use it.
It may be tempting to use the simplest form, the 1040EZ, if you’re eligible. But you should look at the other two anyway. Generally, the longer versions offer more opportunities for tax breaks. For example, the deduction for up to $2,500 in student loan interest can’t be claimed by EZ filers.
Once you’ve made your choice, take a few minutes to read over the form. Here you’ll see exactly where you’ll put the information you gathered on days one and two, and where the deductions and credits are subtracted. (But don’t enter anything yet! We’ve got to have something to look forward to!)
In addition to your main tax form, you’ll get an idea of any additional forms you may need. Where an attachment is required, it will be noted on the individual tax return you file.
For example, if you opted for the long 1040 return, you’ll likely need Schedule A (referenced on line 40 of the 1040) to itemize your deductions. You also might want Schedule B (asked for on the 1040, line 8 and line 9) if you have a lot of interest or dividend income to report. Self-employed taxpayers will see mention of Schedule C or Schedule C-EZ (line 12 of the 1040), along with the accompanying Schedule SE to pay self-employment taxes, (the 1040’s line 27 as a deduction and line 58 as a payment).
For most taxpayers, encountering unfamiliar paperwork is a big aggravation. But by examining the forms beforehand, you’ll have a heads-up about what to expect when it comes time — tomorrow! — to start filling them in.
Day 4: Fill out your forms
Now the real fun begins. Today we put pencil to paper to complete your return.
Actually, this should be a piece of cake (and one that’s preferable to that aging fruit-filled holiday concoction!) because you’ve already got your income, deduction, exemption and credit information at your fingertips.
You can either work your way through income and deduction data stacks, entering the info at the appropriate tax return lines, or you can start at the beginning of your chosen 1040 and work your way down the return. It’s a matter of personal preference, but if you’re not overly comfortable in filing your taxes, you’re probably better off going with the line-by-line approach.
A tip for entering information: Have the instruction book for your return handy. The 1040 and additional forms are pretty skeletal. The instructions help flesh out your entries, provide work sheets you might need and, in some cases, even let you know that a certain line doesn’t apply to your filing situation.
Plus, the instructions are where you’ll find the tax tables. You’ll need these to see just what your tax bill is.
Day 5: Take a break
Ignore your taxes.
You’ve made it past the filing halfway mark. You deserve a break!
Take today’s tax hour and read a book, take a walk or luxuriate in a bubble bath. Tomorrow and taxes will be here soon enough.
Day 6: Check your work
OK, back to the filing grindstone. Today, with a fresh eye, double-check your tax form entries. When people inspect their returns right after they’ve filled them out, they tend to see what they know should be entered, rather than what is actually on the form. But thanks to yesterday’s break, your review today will give you a new perspective.
Simple entry errors, both text and mathematical, are the most common tax-filing mistakes.
Make sure you haven’t overlooked a deduction or a transposed dollar amount.
Don’t forget the obvious. Check names — yours, your spouse’s, the kids, any other dependents. Make sure you’ve entered the Social Security number for each and that the numbers are correct.
Finally, if you’re not using computer software or an online program to make your calculations, plug in the adding machine and check your addition and subtraction again.
Day 7: Sign, seal and deliver
We’re in the home stretch. Confident that you’ve counted all your income, taken all the deductions you can and entered your information correctly and completely, it’s time to wrap up your annual tax filing.
Make one final check of your return to guarantee that all is in order. Then sign it, make yourself a copy and send it on its way, either via the post office (make sure you’ve put enough stamps on the envelope) or by hitting the “enter” button on your computer keyboard.
And what to do with the rest of today’s tax-filing hour?
Pour yourself a cold one, kick back and congratulate yourself on conquering your taxes in one relatively hassle-free week!
S. Raines, Sr. Financial Advisor/Tax Preparer
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