5 IRS Red Flags That Could Get You Audited
March 4, 2009 by Admin
Filed under Tax Issues
In these times of a struggling economy, massive Government spending, and a skyrocketing national deficit, you can be sure that the IRS will work hard to collect every penny they’re owed. The IRS estimates that the gap between what is owed by taxpayers, and what the IRS collects each year, is in the neighborhood of $400 billion. This could lead to higher scrutiny of individual tax returns, and an increasing number of IRS audits.
The IRS keeps their criteria for auditing returns a closely guarded secret, but there are a few things that clearly increase your odds of having to explain yourself to the taxman.
Having a High Level of Income
It’s a problem most Americans would love to have, but earning a 6-figure salary increases your odds of catching unwanted attention from the auditors. There seems to be two reasons for this. First of all, the more you earn, the more valuable your tax reporting error is to the Government. After all, and error of a few hundred dollars is much less interesting than and error of tens of thousands of dollars. Secondly, higher income earners tend to own businesses, rental properties, investment portfolios, and other items that create a more complicated tax return. The more complicated the return, the bigger chance of a mistake.
While having a high level of income sends up a red flag, most folks will gladly take their chances with this one.
Home Office Deductions
If you own a home-based business as either your primary source of income, or a supplement to your regular salary, tread carefully when taking home office deductions. You’re well within your rights to take self-employment deductions, but make sure every deduction you claim is both legitimate and documented, because this will increase your odds of being audited. Resist any temptation to squeeze in a few personal expenses, and if you write off a percentage of your home expenses as business square footage, be conservative, be well documented, and be ready to answer questions.
Charitable Donations
The rules of thumb used to say that you could deduct $500 for charity without any documentation, and not worry. This no longer holds true. The IRS requires that all charitable donations be accompanied by written verification from either the charity, or your bank. If you donate more than 10% of your income, you should be commended for your generosity, but you should also be ready to prove it to an auditor.
Another important note for charitable contributions is that if you’re making a non-cash donation of property (such as a car) and the value is over $5,000, you’re required to have an appraisal done on the property to back-up your claim.
Unusually High Expenses
Steep expenses are another factor that will send a return under the magnifying glass of an auditor. If anything seems excessive, the IRS will take a closer look. If you have unusual expenses, such as very high medical bills, it’s always a good idea to send an explanation along with your return.
Filing a Sloppy Return
A carelessly filed return that is either incomplete or hard to read will invite extra attention. An organized return prepared with a computer eliminates the possibility that a number is illegible, and tax preparation software reminds you to fill in each box and checks for errors. The IRS feels that messy returns are more likely to contain errors. Even a simple oversight means that an auditor has to examine the return in order to correct the mistake. Don’t overlook the details. Be neat, and be precise. Also, make sure you sign your return. If you fail to sign it, the IRS will take a closer look.
As long as you report all your income, have proper documentation to prove your deductions, fill out your forms correctly, and calculate your taxes correctly; you don’t need to fear an audit. However, it’s still a good idea to avoid sending any red flags to the IRS.
Article Source:http://www.articlesbase.com/taxes-articles/5-irs-red-flags-that-could-get-you-audited-799540.html
IRS Tax Estate Planning
March 3, 2009 by Admin
Filed under Tax Issues
You should plan for your estate if you have substantial assets, specifically:
* If you own a business or more.
Do you have a business that will simply stop operating if something happens to you? Or are you partnered with family members and third parties in a business? You will need to plan for your estate to protect your business interests in case you die or become mentally incapacitated.
* If you own significant amounts in your 401(k) and/or IRA.
Retirement accounts like 401(k)s and IRAs are built to cushion your retirement expenses. They are not easily passed on to your heirs. Retirement plans are built in with significant estate and income tax consequences when they are transferred to beneficiaries after the death of the account owner. If you own $200,000 or more in 401(k)s or IRAs, you need to work with your attorney to formulate an action plan for these assets, taking into account your wishes as well as all tax implications.
* If you own a significant amount of life insurance.
Nothing can be more wrong than to assume that the proceeds of a life insurance policy are automatically passed on to the beneficiary tax-free. Although it is true that a beneficiary does not need to pay taxes in order to receive insurance money, the policy itself will be subject to estate tax if it was owned by the insured person’s individual name at the time of death. You will need to discuss with your tax attorney how you can minimize the tax impact of life insurance, and how this life insurance policy can be used to pay taxes and provide financial security to your family.
* You have inherited or will be inheriting substantial assets.
If you are expecting to receive a large amount of money, the right time to plan for them is before you receive them, not after. Before the assets are officially transferred in your name, work with your tax attorney to minimize the effect of those inherited assets will have on your current estate. This is particularly important if you already own sizeable asserts, if your job makes you prone to lawsuits, or are worried about a possible divorce. If you have already inherited the assets, you can still work with your attorney to minimize estate taxes and protect your inheritance from creditors or your former spouse in a divorce.
Take note, you are exempt from federal estate taxes if your estate totals less than $2 million. However, states that impose estate taxes have different exemptions. You will need to sit down with your tax attorney to determine your tax liabilities and to draw a plan to minimize those liabilities.
Tax Planning: It’s Not Too Late
March 3, 2009 by Admin
Filed under Featured, Tax Issues
What is tax planning? Tax planning is really nothing more than arranging your financial affairs to reduce your tax payments. In real-life tax planning, there are actually three ways to do this: (a) reduce income, (b) increase tax deductions, (c) and take advantage of tax credits.
Reduce Income
Your Adjusted Gross Income (AGI) is a key factor in calculating your taxes. Other things that depend on your AGI include your tax rate and tax credits. Because your AGI is so important, you might want to begin your tax planning there. Your AGI is your income from all sources minus any adjustments to that income; always, the higher your total income, the higher the AGI. And the higher your AGI, the higher the taxes you are going to pay. Conversely, the lower your income, the lower your taxes. You can reduce your income by contributing to your 401k retirement or a similar retirement plan at your company. Since your contribution reduces wages, it also lowers your taxes. You can also make adjustments directly to your tax plan by declaring your student loan interest payment, alimony payment, and classroom related expenses.
Increase Tax Deductions
After you have reduced your AGI through deductions and exemptions, you can further reduce your taxes by deducting expenses from your total taxable income. These expenses include:
* Expenses related to healthcare
* Gifts to charity,
* Investment-related expenses
* Job-related expenses,
* Mortgage interest,
* Personal property taxes like car registration fees,
* State and local taxes
* Tax preparation fees,
Keep track of your expenses throughout the year using a personal finance program or a spreadsheet. You can also increase your tax deductions and exemptions by getting married or having more dependents. The best strategy for reducing your taxable income is to itemize your deductions. The three biggest deductions that can be applied against taxable income are state taxes, mortgage interest, and gifts to charity.
Taking Advantage Of Tax Credits
Tax credits reduce your taxes. You can have tax credits on your college expenses, savings for retirement, and adopting children.
While not everyone can qualify to adopt children, anyone can take up college education. There are two types of college education that can be credited to your taxable income: Hope Credit for students in their first two years of college, and the lifetime learning Credit for anyone taking college classes. Your college classes do not have to be related to your career to be applied as tax credit.
Foreign Income: Working Outside the US
March 3, 2009 by Admin
Filed under Featured, Tax Issues
If you are worked outside the United States, you can exclude all or part of your foreign-earned income. To qualify, you must be working and living outside the United States and met the Bona Fide or the Physical Presence tests.
If you meet the qualifications, you can exclude up $91,400 of your foreign-earned income. In general, the exclusion on foreign-earned income can reduce your regular tax liability, but not your self employment tax. Since the amount of exclusions on foreign-earned income changes every year, it is very important to consult with tax lawyers who specialize in the area.
Beginning in 2006, tax payers who claim foreign-earned income exclusion pay taxes at the tax rate applicable to them had they not claimed the exclusion. So, instead of being taxed at the 10% rate, most US citizen expatriates are being taxed starting at the 25% tax bracket.
In general, you can claim tax credit or an itemized tax deduction for taxes paid to foreign government. You don’t need to live or work in that foreign country to claim this tax benefit. You can, for example, claim credit or deduction on foreign taxes paid on your behalf from a mutual fund. You can either claim a tax deduction or tax credit, but not both, for all taxes paid to foreign governments.
Foreign Tax Deduction
You can claim an itemized deduction in the US for foreign taxes paid. In general, however, claiming foreign tax deductions provides the least benefit as far as taxes are concerned. However, if you do not qualify for tax credit, you have no other choice.
Tax credits reduce your tax liability in the United States on a dollar-for-dollar basis.
Maximum Allowable Foreign Tax Credit
The tax credit on your foreign income cannot exceed your US tax liability multiplied by a percentage. In this case, percentage is the total of your foreign-source income divided by your total income worldwide. It¡¯s for you to find out what is the maximum allowable credit applicable to you, since there are different allowable amounts for each income category. There are, for example, different maximum allowable credits for investment income and for salaries.
Carry-back and Carryover of the Foreign Tax Credit
The good thing about foreign tax credits is that you can carry over the excess tax credit amount to a previous tax year, or carry it forward to a future tax year. Foreign tax credits can be only be carried back to the preceding tax year and carried forward for the next 10 tax paying years.
If you had paid foreign taxes in 2004 or the year before, a different time frame applies. Any excess foreign taxes in 2004 and earlier can be carried back to the two previous tax paying years and carried forward for the next five tax paying years. The change in the carry-back and carryover time frame was part of the American Jobs Creation Act of 2004.
Important Things To Know About IRS Appeals
March 3, 2009 by Admin
Filed under Tax Issues
An appeal is simply the reconsideration of a lower authority’s decision by a higher authority. For example, Joe Taxpayer has a federal tax debt of $50,000, is recently married, and has a newborn. Joe Taxpayer provides a financial statement and makes a proposal to the IRS repay his taxes through an Installment Agreement at the rate of $300 per month. The IRS rejects Joe Taxpayer’s proposal for an Installment Agreement because the IRS views Joe Taxpayer as having the ability to make a higher monthly payment than the payment amount he proposed. Joe Taxpayer disagrees with the IRS’s analysis because it appears their analysis is based on a household of one (Joe only) rather than three (Joe, his wife, and child).
In this situation, Joe Taxpayer can and should appeal the IRS’s rejection of his Installment Agreement by filing the appropriate forms and identifying the issues with which he disagrees (i.e. the number of people in his household). If the decision to reject the Installment Agreement is properly appealed, an IRS will assign an appeals officer to review the rejection decision.
The scenario above is an example of an issue that may be appealed. There are different appeals procedures that apply in different situations. Below are the primary appeals process that relate to IRS collection and debt resolution issues.
Collection Due Process Hearing
The Collection Due Process (CDP) hearing is triggered by the receipt of specific IRS notices. The notices that will trigger the right to file for a CDP hearing are:
1. Notice of Federal Tax Lien and Your Right to a Hearing Under IRC 6320
2. Final Notice – Notice of Intent to Levy and Your Right to a Hearing
3. Notice of Jeopardy Levy and Right of Appeal
4. Notice of Levy on Your State Tax Refund
A CDP hearing allows the taxpayer to present their objection to the IRS’s proposed action. At a CDP, the taxpayer can present financials and propose a resolution to a tax debt such as an Installment Agreement, Offer in Compromise, or Currently Not Collectible Status. Additionally, taxpayers can, in limited circumstances, dispute the tax debt.
A taxpayer has only 30 days from the date of the triggering notice to file an appeal. Once the 30-day window lapses, the right to file for a CDP hearing is lost.
If a taxpayer wants to take their issue to U.S. tax court, they are generally required to follow the CDP procedures. This makes filing a proper and timely request for a CDP hearing very important. Because failure to request a CDP hearing will forclose the taxpayer’s ability to take their issue to U.S. Tax Court.
Equivalent Hearing
An Equivalent Hearing is very similar to a CDP hearing, except for these three primary differences are as follows:
1.) A request for an Equivalent Hearing can be submitted more than 30 days after receiving one of the CDP type notices discuss in the preceeding section ;
2. The IRS can continue collection efforts while an Equivalent Hearing is in progress; and
3. A taxpayer cannot move forward to U.S. tax Court if the appeals decision is adverse.
Both the CDP hearing and Equivalent Hearing can be requested by completing Form 12153 Request for a Collection Due Process or Equivalent Hearing.
Collection Appeal Process
The Collection Appeal Process (CAP) is much broader that the CDP process in terms of when the procedure is available. Unlike a CDP hearing, if a taxpayer is not successful, the IRS decision will generally stand and the taxpayer cannot continue the fight in U.S. Tax Court. In addition, a taxpayer cannot under any circumstance dispute the existence or amount of a tax debt. The situations that trigger the right to the CAP are as follows:
1. Notice of Federal Tax Lien
2. Notice of Levy
3. Seizure of Property
4. Denial of Request to Have Seized Property Returned
5. Rejection of Termination of an Installment Agreement
In order to appeal through the CAP, a taxpayer must make an attempt to resolve their tax issue with an IRS manager. If a taxpayer’s issue is still not resolved after speaking or corresponding with an IRS manager, the taxpayer may submit a request for an appeal using Form 9423 Collection Appeal Request. Like the CDP, there are time frames within which the CAP must be filed and those timeframes vary depending on the situation.
The Tax Lady Roni Deutch and her law firm Roni Lynn Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced IRS tax attorneys who will fight the IRS on your behalf.
Article Source:http://www.articlesbase.com/taxes-articles/important-things-to-know-about-irs-appeals-788141.html
Irs Tax Audits – By The Numbers
March 3, 2009 by Admin
Filed under Tax Issues
While the IRS is aggressively pursuing taxes overseas, domestically they have been increasing audits for individuals, higher-income taxpayers, as well as the business returns of S-corporations and Partnerships:
1) Audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers.
2) Audits of individuals with incomes of $1 million or more increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84 percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007.
3) Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year total of 87,885.
4) The IRS increased audits of individual returns with income of $100,000 or more, auditing 293,188 of these returns in 2007, up 13.7 percent from last year’s total of 257,851.
5) Overall, the total individual returns audited increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in 2006. That’s the highest number since 1998.
6) The IRS filed 3.8 million levies and almost 700,000 liens during 2007, an increase from the previous year and a substantial increase from five years earlier.
For businesses, the IRS continued efforts to review more returns of flow-through entities (i.e. Partnerships and S Corporations):
1) Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year’s total of 13,984.
2) Audits of partnerships increased to 12,195 during 2007, up almost 25 percent from the prior year’s total of 9,777.
3) Audits of mid-market corporations increased to 4,473, up 6 percent from last year’s total of 4,218.
4) Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year’s total of 52,223.
Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the number of audits is up 14 percent from the fiscal year 2002 level.
Gary S. Wolfe is an international tax attorney specializing in asset protection, IRS audits and international litigation. Please see http://gswlaw.com for more information. Article Source:http://www.articlesbase.com/taxes-articles/irs-tax-audits-by-the-numbers-789798.html
