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Archive for the ‘Taxes’ Category

Keeping track of tax paperwork

Tuesday, February 2nd, 2010

Its that wonderful time of year again; tax time.  I know all of you out there are jumping for joy but try and calm down, sit back down in your chair and lets talk a bit about organization tax paperwork.  As many of you know by now, organization is not exactly my strong suit.  With that in mind, my wife and I are both making a concentrated effort to keep all tax documents in one place.  Even with that, I have an idea for what I am going to do for next year because there are some things that get missed keeping everything in one place.

I will setup a folder with some categories and accumulate things there over the course of the year:

– House related

– Rental house related

– Business expenses/home office expenses

– Medical expenses

– Charitable contributions

– Income Related

This should help a lot because despite the fact that I have all the ‘important’ paperwork for the year such as W2s, I don’t have any good way of tracking the small, extra expenses.  For example, there were expenses related to our rental house that I did not track that I now have to go back and try and dig up.  There were expenses related to home office and keeping TPS going that I now need to go back and dig up.  We also gave away bags (and I mean bags) of clothing to charity, that I now have to try and estimate.

Good luck to rest of you with your taxes; remember, if you dont claim it, the goverment will!

Ten tax audit flags to be careful of (very careful)

Wednesday, April 15th, 2009

 tax audit

Every year there are only 2% of all returns audited by the IRS but I promise you, everyone in that 2% is absolutely miserable.  There are several ways that your return might get flagged; there is the initial computer evaluation of it for accuracy, the computer evaluation based on a formula and finally the good old fashioned random bad luck of the draw.   So what are some of the things that might trigger an audit?

1. Making more money
If you make more than 100k, you are at higher risk.  Surprise, surprise.  Then again, those that make over 100k probably aren’t complaining about it.

2. High charitable contributions.
This shouldn’t really surprise you.  If Bob makes 50k a year and you make 50k a year, but Bob claims 1/3 of what you do for charitable donations, guess who is more likely to be audited?

3. Using round numbers
Dont round up.  Dont round at all.  It looks very suspicious if everything is neat little numbers.  “I spent 5000 on my home office.”  Yeahhhh…

4. Lying about income
The. IRS.  Will. Find. Out.

5. Screwing up the forms
This is why it really makes sense to use a tax software.  It’s dumb to make mistakes on a form that could flag you when there is so much good software out there to make life simple.

6. Home office / Self employment
The IRS loves to go after people that claim a lot of home office deductions.  I actually went out of my way this year to not put income from this blog into a home office category, because the little bit of money it might have saved me is not worth the greater risk of being audited.  Maybe next year when one of you donates me a ferrari for a work car, then Ill go ahead and get on top of that home office deduction.

7.  Fuzzy Math
Add your numbers correctly.  Better yet, lets talk again about that whole ‘tax software’ thing.  Seriously though, if you add incorrectly, the IRS computer will catch it, and you get to board the train to auditville.

8. Mistyping Dependent information
Make absolutely sure the kids social security numbers are in there correctly, or the IRS computer will most definitely flag it, and you better believe they will follow up on that one.

9. Missing Information
If things are missing, it will get a personal review.  Person reviews lead to audits.

10. Low income
If you are statistically lower than other people in your occupation, it will raise some major red flags.

Good luck everyone, ‘here’s to many happy returns!’

Tax Day Free Stuff – including some free advertising

Tuesday, April 15th, 2008

Here are some things I found around the web that are free for tax day:

-Dunkin Donuts is offering a free donut with any coffee purchase and free coffee to postal workers, no purchase necessary

-McDonalds is offering a free iced coffee with any purchase.  Some other rumors about other free stuff they may or may not be giving away.  I guess go to McDonalds and find out for yourself.

-Walgreeens is offering 15 Free 4×6 photos

-Free Basic Version of H&R Block’s TaxCut Online

-Staples is offering up to 20 free copies

-Free Tax Day Greeting Card.  American Greetings, Hallmark and Blue Mountain are letting people send free “happy” or “freak out” tax day cards

-First person to shoot me an email gets free advertising on The Penny Saved for a month 

Happy tax day!

How to file a tax extension – Form 4868 tax extension

Monday, April 14th, 2008

I’ve had a few reader emails about this so…. your deadline is less than a day away, and you are freaking out about getting your taxes filed, what to do?

As it turns out a lot of people aren’t going to make it but luckily you can file an extension with gives you six more months to file returns. To file an extension click HERE or visit your post office and get the form 4868.

Oh and you’ll be happy to know, filing an extension doesn’t increase your changes of being audited after all (supposedly)…but I still wouldn’t risk it if you don’t have to.

taxes

Tax Audit Survival – Tax man cometh

Wednesday, March 12th, 2008

tax audit cartoonTax audits are sort of like root canals – you go every year and hope you don’t have to go through one. The difference is that at least a root canal is only one day of pain, a tax audit can be weeks of pain. The good news is that most of us get through every tax season without having to do much except fill out our annual turbo tax forms as we file taxes online and send them in.. Others, sadly, are not so lucky. So what happens if you do get picked in the IRS’ wonderful tax audit lottery? Well, we will take a look at that and at what happens if they decide you owe money on your taxes.

Tax audit prep – ALWAYS be prepared

The absolute number one rule of surviving a tax audit is a rule that hopefully you followed before the pain came. Keep track of your records. Collecting and organizing your records through the year will not only make it easier to prepare your taxes but in case of the audit, it will also allow much easier defense of yourself if the IRS picks you. Here are things you should be doing:

-keep at least three years’ worth of tax returns and records
-keep your online bank records if your bank doesn’t do it automatically
-keep your check stubs
-track your cost basis for property and investments
-keep your bills filed
-keep track of deductible items WHEN THEY HAPPEN

Who gets picked for a tax audit?

The IRS has been auditing more and more people every year, but most audits are directed at high income tax payers. I have an entire article on risks of being audited but I will go back over a few quickly:

-Big Charitable Deductions
-Someone rats you out
-Lots of business transactions
-Lots of itemized deductions
-Not reporting cash income (hello waiters)
-Inaccurate W-2 or 1099 Reporting
-Tax Shelter losses
-Home business expenses
-Prior audits (if there were problems)

Getting ready for a tax audit

If you get the lucky distinction of being chosen for a tax audit, its time to get audit prepared. The first thing to do is go back over every inch of your tax return and get VERY familiar with it. Once you have that straight its time to gather all of your records to support whichever items were questioned by the IRS. Before the actual examination you should figure out what kind of settlement you are looking for…the IRS likes to settle because it saves both parties headaches. If things go this far it might be in your best interest to get a tax attorney because they are knowledgeable and have dealt with it before. However, if you believe you are in the right and all of your records match it probably will not go that far…you may simply have to present your records.

What you should NOT do is offer any information not related to the IRS questions. This can potentially get you in trouble if they decide to audit OTHER items. Offer what is requested, nothing more.

What happens if I owe money after the tax audit is complete?

If you underpay, you may have one of these penalties:

20% Penalty – This is the “basic” penalty. It goes along with problems with property value, understating liability, messing up on your return, etc.

75% Penalty – If the IRS thinks you have been fraudulent in your claims this is where you get in big trouble. This deals with all of the “serious” tax offenses that aren’t jailable offenses.

Prison – Were you doing some tax evasion or other tax crimes? You can not only get massive fines, but even go to jail.

Ok so a tax audit is scary, but the truth is you can survive if you haven’t committed any serious crimes. The odds are good that you WILL pay some additional taxes so don’t get too discouraged if you owe more than you originally thought….but hey, better than jail. If you have organized records, you can get through it without too terrible a headache.

Guilty until proven innocent – avoiding a tax audit

Tuesday, February 26th, 2008

Ah yes, its tax time again. Time to look back on your W2s and become depressed at the 4-6 digit income you have provided the federal government to build bridges to nowhere. Ok ok all cynicism aside, we all have to go through the tax season, which ranges anywhere from refund party to, to use my friend as an example “Oh God, Oh God, I owe double social security because I am contractor….I DIDN’T BUDGET FOR THAT” sort of panic. (Actually hes not panicking at all, but its great for dramatic effect)

Ok so the most ominous of all things tax is the little word we call “audit.”

What IS an audit exactly?
It is where the government comes to investigate to determine if the information you gave to the IRS on your tax return is correct – which results in them telling you whether the proper amount of tax was paid. Oh except that there are a few details, such as, if they decide that you were purposely avoiding paying some taxes, you can go to jail. Thats right buddy, jail. And (un)fortunately (for the taxpayer), the IRS works the opposite of our legal system. You are guilty until proven innocent. Thats right my friend, the burden of proof is on you, the taxpayer if the government comes a knockin. Some audits are fairly routine where they ask you to just clarify a few things via mail. Then there are other audits where you go to a government office, and still others where the government COMES TO YOUR HOME. Awesome.

Ok now the bad news is that there is no way to completely avoid an audit…some returns are chosen at random. However most are chosen because of certain triggers and red flags that the IRS uses to determine if you are stealing your money from their pockets.

1) Be neat or better yet use something like turbotax
Appearance really does matter. One of the worst things you can do is turn in a handwritten return and you want it to at least look like someone who has a clue what they are doing. I really really really encourage the use of tax prep software, it completely eliminates math mistakes….which happens to be the #1 thing the IRS looks at.

2) Report all income
No Im not referring to the garage sale you had last Saturday where you sold that old sofa for $5 and some old 80s abba records for 10 cents. Any income that you have done as a contractor for a business, as an employee, from capital gains (stocks etc) has to be reported. I am not just speaking ethically because businesses report to the IRS as well and so when they send you that tax form in the mail, its not for nothin….the IRS has it too. This is ESPECIALLY important if you are in a career that is paid primarily in cash. Fair or not, the IRS loves auditing cash earners because they assume we all cheat.

3) Make sure your income matches your lifestyle
If are reporting that you earn $30,000.00 but you live in beverly hills and drive a ferrari, you are probably going to have trouble. The IRS can and WILL reference your income against your zip code. Kind of scary, huh? Also if you drop income substantially from year one to year two it could also get flagged.

4) Be VERY careful about claiming business expenses
Business expenses and home office deductions WILL raise the IRS interest. Huge deductions and loss write offs will have Joe Auditor showin up at your door in no time. Oh and those emails going around saying “you would never know it but you can deduct…” are not true. Not only are they not true but the IRS looks for them. So no you can’t deduct that BA suit or dress you bought just because you wore it to work. My favorite is probably that if you work from home you can deduct your HOUSE. Yeah, no.

5) Make less money
The more you make, the more likely you are to be audited. But hey, triple my income, Ill take my chances.