Topics:Dealing with tax debt tax debt facts Choosing a tax relief company Tax audits tax preparation financial planning business taxes
This is the third installment of the short "Intro to Tax Relief" series, presented by Tax Defense Network. You can learn more about them by reading their full review. There are few things more disquieting than opening your mailbox and seeing the IRS logo on the corner of an envelope. You might not even have a reason to worry as far as you know, but you automatically begin worrying all the same. Everyone does. After all, what could a letter from the IRS be but bad? It's a common misconception that all notices from the Internal Revenue Service are sinister. Regardless of your opinion or prejudice, you definitely want to open that letter and read it carefully. Don't even think about throwing it away. There are people who make the mistake of simply tossing an IRS notice, hoping that disregarding it will make whatever the problem is go away. That is, until the next notice is sent...and then the one after that. The IRS has no shortage of letters they'll send you and, if they have something they really want to talk to you about, expect plenty of mail. It shouldn't come to that, though, because you're going to do the right thing and open that letter. You don't have anything to hide and, if you do, it's clearly not working. If you've done something underhanded or misleading on your return, a letter from the IRS shouldn't be a surprise. If, on the other hand, you're like most people and filed accurately and honestly - to the best of your knowledge - you may be anxious for no reason. The reality is that the IRS sends a variety of letters, not just warnings of an audit or potential tax debt. Whatever notice you receive will be designated by a "notice number", which has a corresponding definition on irs.gov. Here are a few of the standard notices, including some to worry about: 1. CP05 This notice is sent to inform you that your return is being reviewed. This could be because something you reported seems askew or it could be completely random, but you're not required to take action. The IRS is simply giving you a heads up and letting you know they may be talking to third parties to verify everything you reported is accurate. It's not a bad idea to review your return and, if you filed with a tax preparer, you may want to give them a call to help you. 2. CP09 You'll see this one if you may be eligible for the Earned Income Credit, or EIC, but didn't claim it. Obviously, this is good news for you and definitely something you want to take advantage of. You'll get a worksheet, which you should complete and send back if what they're seeing is accurate. Assuming you don't have any outstanding IRS debts, you should see a refund within six to eight weeks of sending in the EIC worksheet. 3. CP11 This notice is sent because the IRS has made changes to your return to correct a miscalculation and, as a result, you owe money. Admittedly, this is not the ideal letter to get, but it's important that you know about the issue as soon as possible. There are a couple reasons for this: first, the IRS might be wrong in their assessment and, if so, you can make an appeal or participate in an audit. If you are in the wrong, you can either pay the debt in full or make arrangements as soon as possible to avoid penalties and interest. No matter which way you cut it, responding to the notice quickly is in your best interest. 4. CP14 You'll receive this notice if you owe money for unpaid taxes, plain and simple. This one may not come as much of a surprise, as you're likely to get it if you owed money from the beginning but didn't pay. If, for instance, you filed your return but failed to send in a check for the amount you owe in taxes, the IRS may send you the CP14 notice. Again, paying sooner rather than later will save you both aggravation and money. 5. CP75D Your tax return's being audited and you're being notified because may need to provide some documentation. While it may not be appropriate to panic, you should definitely respond promptly. Whether your return was selected for audit due to inaccuracies or completely at random, you'll need to verify what you reported through records the IRS requests. Be sure to send them copies of any documents and retain the originals in case you need them for the future. Pandora's Box It might seem like avoiding an IRS notice is a good way to prevent a problem, but a problem may already exist whether you like it or not. On the other hand, the IRS could very well owe you money, and there's little chance you would argue with that. The bottom line is that no matter what the reason is for the letter, there's no good reason not to open it. Depending on what notice you get, you may want to consider requesting help from a licensed tax professional. It's important to begin working on a formal resolution as soon as possible, anda tax pro can do just that. Whatever you decide to do, remember that the first step is tearing open that envelope and seeing what's inside. *Written by Christopher Wiggins, Content Writer for TDN.
Filing your own tax return is easier than ever. Follow these five simple steps to avoid scams, overpayment, and potential audits. 1. Choose your tax software wisely The drastic increase in email schemes, 400 percent in 2016, requires extra vigilance on your part. You may receive communications from tax software companies that are really phishing schemes designed to steal valuable information. Rather than clicking on email links, diligently research tax preparing software before entering any personal information. Once you find a legitimate company, make sure you don't pay more than is necessary. Many companies offer free software for both federal and state returns. The IRS offers a free software lookup tool to help you choose the one that is right for you. Popular offers include the following: H&R Block's Free File TaxAct® Free File TurboTax® All Free SM Online Taxes at OLT.com These are sufficient for most simple 1040 returns. If your return needs more advanced software, carefully compare offers to find the best deal. 2. Gather and organize documents Make sure you have all the necessary documents before you start your return. This should include the following: Personal Information Social Security numbers for you, your spouse, and any dependents Income Information Income from jobs (W-2) Interest from bank accounts/certificates of deposit (1099-INT) Dividends and capital gains from stocks/mutual funds (1099-DIV) Earning from sold stocks/bonds/mutual funds (1099-B) Debt cancellations (1099-C) Unemployment compensation and state or local income tax refunds (1099-G) Payments from credit card or third-party processors (1099-K) Withdrawals from retirement accounts (1099-R) Self-employment or independent contractor income (1099-MISC) Social Security benefits (SSA-1099) Rental property income You may qualify for income adjustments and tax credits. Gather all receipts or proof of contributions that may relate to the following: Income Adjustments These deductions are subtracted from your income before tax is assessed, lowering your adjusted gross income. The most common income adjustments include the following: Qualified student loan interest Health savings account contributions Educator expenses Moving expenses Self-employment deductions Qualified business expenses Qualified traditional IRA contributions Tax Credits These credits are applied to the amount of owed taxes, lowering your tax liability. The most common tax credits include the following: Earned income tax credit Child and dependent care credit Child tax credit Adoption credit Lifetime learning credit American opportunity tax credit Savers tax credit Residential energy tax credit For additional credits visit the IRS' website. Once you have all your tax documents and applicable receipts you are ready to start your tax return. 3. Verify dependents and filing status Claiming Dependents The IRS has strict rules for claiming dependents. Dependents are typically either qualifying children or relatives. General rules include the following: Meets citizenship requirements Has NOT filed a joint return Has a social security or taxpayer identification number Children Lives with you half the year or more Is related to you (child, stepchild, foster child, adopted child, sibling, stepsibling, grandchild, niece, or nephew) Is under 19 (or 24 if a student) Is younger than you (unless he or she disabled) Relatives Lives with you the entire year Has a gross annual income of less than $4,050 You provide over half of his or her total support Dependents can only be claimed by one person. In cases of divorce or legal separation, a child can only be claimed by one parent, typically the custodial parent. If you are filing taxes for the first time, you need to verify that your parent or guardian is not claiming you as a dependent if you seek a personal exemption. You can use the IRS' Interactive Tax Assitant to help you determine whom you may claim as a dependent. Filing Status Often filing statuses are straightforward. The five filing statuses are as follows: Single Married filing jointly Married filing separately Head of household (designed for unmarried persons who pay over half of household expenses with a qualifying dependent) Qualifying widow(er) with dependent child (provides benefits of married filing jointly status for two years after a spouse's death) You may qualify for more than one status. For instance, if you are married, you have the option to file jointly with your spouse or separately. Note that choosing to file jointly makes both spouses equally accountable for any tax debt and legal liability. If you must choose between two options, pick the one that has the lowest tax liability and greatest savings. 4. Compare itemized vs. standard deduction As you prepare your tax return, you will need to choose between a standard or itemized deduction. For the 2017 tax year deductions are as follows: Single or Married filing separately: $6,350 Married filing jointly or Qualified widow(er) with dependent child: $12,700 Head of household: $9,350 There are additional deductions if you are 65 or older or blind. They are either $1,250 (Joint or Widow(er)) or $1,550 (Single or Head of household). Choosing to itemize deductions makes preparing your return more difficult but is worth it if will save you money. The single determining factor is whether or not the itemized deduction is higher than the standard deduction. You can itemize the following: Charitable donations Medical expenses State and local taxes Real estate taxes Home mortgage interest Casualty and theft losses (i.e. damage from car accidents or natural disasters) Miscellaneous expenses (i.e. union dues, tax preparation services, supplies for work) 5. Final check and submission Once you have gone through all the steps to complete your tax return, double check your numbers. Computers make errors so make sure everything adds up. Make sure you are maximizing your savings by applying all relevant credits and deductions. Don't forget to sign your return! If you are eligible for a refund, you can either have a check mailed to you or have a direct deposit into your bank account. If you owe money, try to pay your tax debt right away. If you are unable to pay it in full, you can negotiate a payment plan with the IRS. However, if it beyond what you can pay or you have concerns, you can talk to a tax professional and discuss your other options. Once it is submitted, save a copy of your return and relevant documents (W-2s and receipts). Though your chance of being audited is low, it is important to hold on to all relevant documents. Keep your records for at least three years. Congratulations, you're done!