A Taxing Situation

Income Tax Filing Deadline - April 17, 2012

Again this year, we will be filing for an extension on our income tax return. Before we had a business we always filed on time – even early.  Business complicates the process.

In honor of T-Day, I thought I would provide some tips and info that I have accumulated on taxes. This is not new stuff – I didn’t create it; but I thought it might be helpful nonetheless.

An audit is an IRS investigation that the government uses to determine if taxpayer returns are accurate. There are three types of audits: the mail audit, the interview audit, and the field audit. The mail audit is the most common and is usually the result of a calculation error. For the interview audit, the taxpayer takes all relevant material to an IRS regional office. In a field audit, an IRS representative visits your home or business.

Each year, the IRS audits 2-3% of individual tax returns. This equates to about 4 million returns. There are several different methods the IRS uses to determine who to audit. Although you can’t avoid the random selection method, there are other things that you can do to help minimize the possibility that your return will be flagged for audit.

• File…Period. If you filed taxes in previous years and decide this year not to file, you are asking for trouble. The IRS can identify people who have filed in the past and if you fail to file in the current year, they can hunt you down! 
• File by the deadline. This year’s deadline is April 17^th at midnight. Returns must be postmarked by this date and time to be considered timely.
• Choose a reputable tax preparer. Be cautious of your tax preparer. If he promises huge returns and doesn’t ask for proper documentation, you may want to reconsider. The IRS has implemented a new safeguard this year called the Preparer Tax Identification Number (PTIN).The intent here is to issue PTINs to legitimate preparers.  Ask to see your Preparer’s PTIN. Regardless of the situation, you are responsible for your return.
• Eliminate Mistakes. The number 1 mistake made on tax returns is putting down the wrong social security number. Make sure that your social security number is correct and that it matches any W2s or 1099s. Do the math…again and again. Simple calculation errors can hold up your return for weeks. If you are completing your own return, you may want to look into tax software. The great thing is, the IRS has partnered with major software vendors to offer taxpayers the option to file federal taxes for free. Some packages allow state filing as well. Go to www.IRS.gov and click on the Free File link in the upper right.
• Don’t brag about pulling one over on Uncle Sam. We all joke about Big Brother and the government watching us. But did you know that the IRS will reward whistleblowers up to 30% of any additional tax or penalties they collect from tax cheaters? You shouldn’t be cheating the government for starters and you should be cautious about bragging about it if you do.
• Schedule C. The IRS is more likely to be skeptical of a taxpayer who files a Schedule C with their return. In many cases, business income and expenses reported on a Schedule C are considered a hobby and will throw up a flag for audit. If you include a Schedule C with your return, you may want to consider reorganizing as a corporation or partnership.
• Home Office. Deducting a home office almost always throws up a red flag. If you do have a home office, you should make certain that it adheres to the qualifications of the IRS. For your home office to be a legitimate deduction, it must be used exclusively for work and must be your primary place of business.

These are just some of the things you can do to lessen your chances of being audited. For a full explanation of tax returns, filing requirements, deductions, etc. visit the IRS website.

Additional Resources:

http://www.irs.gov/ "The IRS" Department of the Treasury, 2002.
http://www.usa.gov/Citizen/Topics/Money/Taxes.shtml “File Your Taxes” (Learn more about filing your federal and state income taxes.)

http://www.ssa.gov/planners/taxes.htm “Taxes and Your Social Security Benefits”