Tax Debt Help – IRS Form You Should “Never” Sign
There are forms an Auditor may ask you to sign that can take away your rights.
You could lose your right to appeal, your right to claim deductions and your right to prevent enforced collection action.
Form 872 is one of these forms. It extends the amount of time the IRS can take to assess a tax … time they may not have if you don’t sign.
If you do not feel comfortable about your rights during an audit procedure, it is always in your best interest to consult or hire a professional to assist you with the process and your rights.
It is always best to be proactice rather than reactive!
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – Alimony and your 1040
You ladies and sometimes men also, who are recipients of alimony should realize that this is reportable and taxable. It is taxable income for the recipient and is a tax deduction for the payer.
Alimony received is reported on Form 1040 Line 11.
Alimony paid is reported on Form 1040, Line 31. Alimony Received
You must report the full amount of the alimony received or separate maintenance you received during for the tax year.
Please remember that alimony and child support are completely different items. Child support is not reportable or taxable for either the payer or receiver.
Your ex-spouse must report the amount of alimony paid along with your full name and Social Security Number to the IRS.
Failure to Report Alimony
The question is, “What if I don’t report my alimony?”. Well, simply put, failing to report alimony on your tax return will result in an IRS audit. Since alimony paid is a tax deduction for the person paying you the alimony, it is highly probable that the IRS will find out how much alimony you received, and audit your tax return.
According to the IRS, “If you are the spouse or former spouse who is receiving the alimony, you must report the full amount as income on line 11 of Form 1040. If you do not give your social security number to your spouse or former spouse who is making the alimony payments, you may have to pay a $50 penalty.”
Alimony Paid
If you paid alimony or separate maintenance to your ex-spouse, report the total amount of alimony you paid during the year on Form 1040 Line 31. Do not include any child support payments in this figure. You must report your ex-spouse’s full name and Social Security Number on Line 31b, and the amount of alimony on line 31a. Alimony is tax deductible as long as you meet the following six requirements:
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For further information on the filing requirements of Alimony, check out IRS Tax Topic 452, Alimony Paid
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – Decrease Your Chances of An Audit
Found a nice list online tonight about some suggestions on how to avoid an audit. Of course being honest is the best policy ’cause the IRS can make your life very miserable if they want. So some things to watch:
Self Employed take notice. It should go without saying that certain jobs would attrack more attention – and the Self-Employed folks should use the upmost caution. Also those who have a large portion of their income as cash (servers, casinos, basketball tournament pool operators) is also of interest. Be careful.
Dead-beat moms. If you get alimony make sure you report it. Rumor has it the IRS now, sorry, marries couples’ claims of paid and received alimony.
Keep the money at home. Today’s connected world make it easy for over a million Americans to have offshore credit cards. Apparently people think they can hide money from the scrutiny of the IRS; while you might get away with that, you’ll likely get more noticed. And worse case scenario? Home Land Security thinks you up to something. Hello Camp G-bay!
As I always say, “be proactive rather than reactive”!
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – “Audit – The Tax Game”
Interesting article by a writer at the Charlotte Observer who compares doing taxes with preparation software to playing a video game.“It’s really easy to look at that running total and play with the numbers until you get the one you like,” says Los Angeles-based tax expert Eva Rosenberg, who runs advice Web site TaxMama.com. “But it’s not a great idea if you can’t back it up.”
S. Raines, Sr. Financial Advisor/Tax Prepaper
Tax Debt Help – Preparing for the Audit
How to prepare for an audit
It’s the last thing most people want to see at this tax-paying time of the year: A plain brown envelope marked “Official Government Business” with the return address of the Internal Revenue Service.
But don’t panic. The news might not be as bad as you think.
While a full-blown tax audit might be your first thought, that notice might be the extent of your contact with the IRS. The agency might be telling you that you’ve made a math error on your return that must be fixed. Or maybe something on your W-2 doesn’t agree with your tax return. In such correspondence audit situations, you usually can clear up the discrepancy with a couple of exchanges of information via the mail.
Then again, the worst could happen and that envelope could be a notice that one of your past tax returns is being audited in full. In this case, what do you do?
This makes a good case for having a professional prepare your tax returns!
Enrolled Agents never recommend that a client call the IRS themselves nor attend the audit. They can unwittingly reveal information that is not required and potentially cause more problems. A tax professional licensed to practice before the IRS can deal with the IRS and attend the audit for you.
Even with professional representation, you still must prepare for an audit by gathering information and taking it to your tax representative. Three top tips for preparing for an audit are, “Good records, good records and more good records.” In other words, adequate record keeping year round, not just on April 15, is essential in case of an audit.
More specifically, how should you, a taxpayer, prepare for an audit if it happens? These tips will point you in the right direction:
· Retain the services of a professional. Enrolled agents, tax attorneys or CPAs may represent you at an audit. They are trained in tax law and can much better represent you than you can represent yourself. To a lay person, reading the tax code is like reading a foreign language. Enrolled agents have been around since the post-Civil War days and go through relatively grueling training in this very area.
· Keep good records. It’s not enough to just pull your records together year-by-year on April 15. Get in the habit of keeping good primary and secondary tax records year round and using a personal filing system to keep them with the appropriate tax return. Then, if you’re tapped for an audit, you’re prepared. It alleviates so much stress when you can put your finger on a document when you need it. Primary records are bills and receipts. Secondary records may be spreadsheets, mileage logs or other summary information you’ve kept. Warren recommends that you keep all tax returns, but that you keep your backup information for the current year plus three past years.
· Gather information. What if you haven’t kept good records for the tax year in question? Go back to that year and try to re-create records as accurately as possible. If you’ve claimed expenses in certain areas, like medical expenses, it’s possible that your doctor or hospital will still have those medical records on file. Don’t hesitate to call them. You can also call your place of employment and ask for duplicate W-2s or 1099 forms or check with your mortgage company for interest expenses for that year or your county for personal property taxes paid. Put everything in a neat format, summarized but with supporting documentation, to take to the audit with you.
· Do your homework. Research what the audit process is likely to entail. Check with people in your industry or workplace to see if any of them have gone through the process. Find out what it was like so you can prepare yourself. You might be able to avoid some of the stresses they endured. Knowing what questions the IRS examiner might ask can also help lower the fear factor. The agency prepares audit guides for its examiners, with many of them posted on the IRS Web site. Check them out, says Einbinder, so you can go into the audit knowing, at least in part, what the auditor is going to ask.
· Behave professionally. Generally, the IRS will set the time and place for an audit. Comply with their wishes if possible. If you or your tax representative cannot attend the audit at the time they set, negotiate another time with them. Remember that taxpayer presentation is critical. “Be polite, prompt and professional,” says Einbinder. “It will get you so much further.” Don’t show up at the audit wearing jeans and with your receipts in a shoe box. Be on time, be organized and take the audit seriously.
· Realize that the IRS auditor is not your friend. You can be sure of two things with an IRS auditor. First, he/she pays their taxes. Second, there is an implicit assumption that you may have done something wrong, perhaps unwittingly, or you wouldn’t be there in the first place. Be forthcoming with information but only answer questions that are directed to you. Never volunteer extra information. Don’t be surly or impatient, but also, don’t be fearful. Be confident that your tax return was correct and that you have records to prove it.
The good news is that all audits do not result in the taxpayer owing extra taxes. There are many audits that prove the IRS actually owes you instead of the other way around. Start now on your record-keeping system if you do not have one. If you have a complex return or if you’re unsure about calculating deductions, hire a tax professional to prepare your return. It may pay off in the long run. The best defense, with regard to an IRS audit, is always a good offense.
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – Tempting the Tax Auditor
It is the most dreaded letter a taxpayer can receive.
Dear Taxpayer,
Some of the information that you provided to us does not agree with the information we received from other sources. — The Internal Revenue Service.
You’ve just joined an elite club, one whose initiation ritual is an IRS audit. Unfortunately, you can’t refuse membership — and the dues could be astronomical.
When the IRS Reform and Restructuring Act was enacted in 1998, lawmakers ordered the agency to focus more on taxpayer rights instead of collection activities. Not surprisingly, the number of audits — or examinations, as the agency prefers to call them — dropped dramatically.
The first year of the kinder, gentler IRS, about one of every 79 tax returns were audited. By 2003, it was even easier for tax scofflaws; that year, according to IRS data, only one of every 150 individual taxpayers were audited.
But the tax times, they are a-changing.
More audit attention
The number of audits in 2005 was the highest since 1998, just before the agency’s operational structure was realigned. The trend is continuing. During fiscal year 2006 (from Oct. 1, 2005, through Sept. 30, 2006) IRS figures show that the agency completed more than 1.28 million audits of individuals, up slightly from the 1.25 million scrutinized the year before.
That sounds like a lot and the IRS is pleased that its agents are catching more incorrect returns. But overall, the examination rate of individual returns in 2006 was just under 1 percent, statistically the same as in fiscal year 2005.
Don’t breathe easy just yet. If your tax return included a Schedule C detailing any self-employment income, you are three times more likely to face IRS questioning. And the IRS says it will be stepping up audits of filers who run their own unincorporated businesses.
Since this type of income has no verification mechanism (i.e., the IRS can’t double check much of it in the way it can verify wage income via an employer-issued W-2), tax officials believe that many self-employed individuals underreport their income. The IRS also is keeping an eye out for potential scams that show up on returns.
Crackdown to continue
You can count on the tax-cheat crackdown to continue.Washington, D.C., lawmakers, who once demanded the IRS give taxpayers the benefit of the doubt, are applauding the new aggressive approach. The reason? Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. That amount, based on 2001 figures, represents the difference between what taxpayers should have paid and what they actually paid. Without some help from additional IRS collections, Capitol Hill faces the prospect of raising taxes.
In March, IRS Commissioner Mark Everson reassured Congress about enforcement efforts. He told the Ways and Means Oversight Subcommittee, during its annual look into IRS operations, that the agency is committed to continued audits. In particular, Everson said, the IRS will continue to look closely at returns from wealthier taxpayers, particularly filers with incomes of more than $1 million.
Viewed against the total number of returns filed each year (the IRS is expecting around 136 million individual returns this filing season), the nominal increase in recent audits still means that most of us will likely escape extra IRS scrutiny.
You can make sure your examination chances are even more statistically remote by ensuring that, in your zeal to cut your tax bill, your 1040 doesn’t send the wrong message.
What’s the DIF?
“Don’t draw any more attention to your return than you need to,” says Robert G. Nath, author of “The Unofficial Guide to Dealing with the IRS.” “Simple, plain-vanilla returns are fairly safe.”Most returns chosen for audit are flagged by an IRS computer program known as the Discriminant Function System, or DIF, in tax parlance. The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But Nath, a Washington, D.C.-area tax attorney, says it’s no mystery that the system is designed to screen for returns that could put more money in the government Treasury.
How do your deductions compare?
Tax experts believe one discriminate function component looks at average deduction amounts. This allows IRS examiners to spot inconsistencies, such as a high mortgage interest deduction and low income. Tax specialists examined 2004 return statistics and came up with the following itemized deduction averages. These are for illustrative purposes only. Experts note that the IRS takes a dim view of taxpayers who base their claimed deductions on these figures. The numbers can be useful, however, in giving you a general idea as to whether certain deductions on your return might seem out of line.
| How do your deductions compare? |
| Income range | $15,000- $30,000 |
$30,000- $50,000 |
$50,000- $100,000 |
$100,000- $200,000 |
$200,000 or more |
| Medical expenses | $6,229 | $5,324 | $6,125 | $9,811 | $31,332 |
| Taxes paid | $2,761 | $3,592 | $5,808 | $10,528 | $38,143 |
| Interest paid | $6,664 | $6,933 | $8,310 | $10,949 | $19,721 |
| Charitable contributions | $1,969 | $2,132 | $2,663 | $4,130 | $19,014 |
So what triggers a discriminant function red flag?
· Higher incomes.
· Income other than basic wages, for example, contract payments.
· Unreported income, such as investment returns.
· Home-based businesses, especially when in addition to salary income, and home-office deductions.
· Noncash charitable deductions.
· Large business meal and entertainment deductions.
· Excessive business auto usage.
· Losses from an activity that could be viewed as a hobby rather than a business.
· Large casualty losses.
Returns claiming the earned income tax credit, designed as a tax break for lower-income wage earners, also catch IRS eyes. The credit’s complexity often results in legitimate mistakes on returns. Some filers, however, have been caught making false claims to increase the payment the credit provides.
Don’t cheat yourself
Don’t let fear of a >potential audit discourage you from filing for credits or taking legitimate deductions.Even if your return is questioned, it’s not a foregone conclusion that you’ll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, Nath says, they will be allowed.
The groundwork you put into preparing your return will pay off in an audit situation. Be confident in what you entered. That’s easy when you have good records to support your tax return entries.
Three types of audits
If your return is selected for a closer look, don’t panic and don’t ignore IRS inquiries. But even tax professionals admit that’s easier said than done.
If I get a letter about one my clients, I still get that panicky feeling and I’m a professional. Once you get past those initial inquiry butterflies, determine exactly what the IRS wants and how much time it will take to give them the answers.
If you’re in the audit majority, you’ll fall into the least-intrusive category, the correspondence audit. This is the easiest process for both the taxpayer and the IRS. In this case, the IRS sends the taxpayer a letter asking for more information about one or two relatively simple items.
Just because you get a correspondence audit letter, there’s no need to panic. In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth-shattering.After you provide the requested information, the case is usually closed. If not, you’ll get another letter describing the additional taxes to be paid. In these cases, the IRS is not necessarily putting your return under a lot of scrutiny. They just want questions answered, some clarity. If questions about your tax return are more serious, you’ll be asked to meet with an examiner at an IRS district office near your home. These agents generally have more training and experience with complex returns. Bring only the documentation needed to answer specific IRS questions, but don’t bring or volunteer other data unless you want to open up those records to examination, too.
Finally, there’s the field audit. This investigation is done at the taxpayer’s home or business and is more wide-ranging. Wealthy taxpayers and businesses are generally the target of a field audit, which gives agents a chance to conduct a “lifestyle” audit. Here, an IRS agent gets an up-close-and-personal look at a taxpayer’s house, neighborhood, car and everything else on hand to see if it meshes with the return’s stated income. If a taxpayer has a new Jaguar parked in the garage of a six-bedroom house and reports income of $40,000 a year, he likely will have some explaining to do.
When you get a notice of any type of audit, respond immediately. After you’ve acknowledged the audit notification, you usually can get a postponement if you need time to gather records. And it’s never too late — even after the audit begins — to get professional help, such as a tax attorney, certified public accountant or enrolled agent.
You have rights to contest audits at every level of the process.
Regardless of what kind of audit you might face, the key is to be prepared.
S. Raines, Sr. Financial Advisor/Tax Preparer
www.effectur.com
Tax Debt Help – “The Top 5 of the Dirty Dozen List of Mistakes”
After receiving the November, 2007 issue of the FEDERAL TAX ALERT from the National Society of Tax Professionals and reading this article, I felt that I really needed to pass this information along. And trust me, it is the most valuable information that you can receive for the 2008 tax season or for any tax year.
Checkout “Ten Ways To Annoy An IRS Agent” first.
http://www.youtube.com/watch?v=5NkG2Ho39iU
“The IRS announces each year what they are going to be looking for in their annual “Dirty Dozen” report. They also make the audit statistics available in order to see that they are auditing taxpayer’s returns.
The following are the top five red flags for audits. They include:
Location. Where you live makes a difference in determining whether you are more at risk from an audit. You are more likely to get an audit if you live in one of these places:
Los Angeles, North Central District (ND, SD, MN), Southern California, Northern California, Manhattan, Central California, Brooklyn, Southwest (AZ, NV, NM), South Florida and Houston.
How Much You Make. This statistic is fascinating. It would seem to make sense that the IRS is more likely to audit people who make more money. But, the fact is that they are actually more likely to audit people who make LESS money. In fact, the most likely return to be audited is a return that includes a business that makes less than $25,000 per year. If you do not have a business, you have the most chance for an audit if you file a Form 1040A and make less than $25,000 per year. Business Entities. If you have a business, you are much more likely to be audited if you operate in a Sole proprietorship, Schedule C. In fact, you are ten times more likely to be audited as a Sole Proprietorship than if you are an S Corporation or C Corporation. Why? That is because most Sole Proprietorships do not have great recordkeeping systems and the IRS knows that.Under-reporting Income. the IRS receives copies of your K-1s form Limited Partnerships and S Corporation, 1099s from interest, dividends and sales, and W-2s. If you do not report these items on your return, or you report a different amount, your return will get pulled for inquiry.Who Files Your Return Matters. If you have a complex return and prepared it yourself or if your return was prepared by someone on the IRS’s problem preparer list, you are more likely to be audited.”The most important advice that you need to remember is “once you have been audited, then you cannot go back and amend a return for changes”. Once the audit has taken place you will have to live with the IRS’s decision and finding. And once that happens, most folks find themselves having to solicit the help of Tax Resolution services such as Effectur, Inc to help with audit representation and negotation of payments. “What is the difference between a taxidermist and a tax auditor?” The taxidermist takes only your skin!”…………
S. Raines, Sr. Financial Advisor/Tax Preparer
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