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Most tax audits have relatively smooth processes. The nightmare stories of tax audits from hell come from the few cases where taxpayers were unprepared. Lack of preparation leads to a weak defense and a growing mountain of IRS debt.That’s why we’ve prepared this expert-supported guide for surviving a tax audit.You should know beforehand that the auditor’s job isn’t to take as much money as possible from you; the auditor’s job is to verify deductions and correct mistakes made on the taxpayer’s tax returns. However, complications may arise: What happens if you don’t have the necessary documents and receipts? Should you hire a tax professional to handle your audit? How long does the tax audit process take? Overview of a tax audit and audit defense strategies You need to know what caused the audit, how to prevent audits from happening in the first place, and what to do if you find you’re going to be audited by the Internal Revenue Service (IRS). Luckily, David W. Klasing, Founder of the Tax Law Office of David W. Klasing, has provided this succinct overview of tax audit defense: Factors that trigger audits Most people are unlikely to be targeted, running about a .5 percent chance of being audited. However, the IRS has been increasing the number of audits it conducts, targeting abusive tax shelters, high-income taxpayers, and corporations. These factors can contribute to being chosen for an audit: Your income. More than $1,000,000 in income increases your odds to more than 8 percent; more than 10,000,000 in income puts you in the 34 percent chance of audit group. Your profession. People who are self-employed and do not receive a W2 for their work are more likely to be selected. Home office expenses. Claiming them increases your risk. Related examination. If your returns include transactions with other taxpayers who were audited, such as investors or partners, you're more likely to be audited. Documents don't match. When Forms W-2 or 1099 or other documents don't match what's reported, you may be audited. Kinds of transactions reported. Disproportionately large business expenses, very big charitable deductions, tax shelter losses, excessive itemized deductions, and complex business and investment transactions raise red flags to the IRS. Rounded numbers. Be accurate, and check your figures. Hiding cash or other income. This is especially risky for people with offshore accounts. Audit history. If you've been audited before, your audit risk is higher. Random selection. The IRS lists computer screening and random selection as audit triggers. How to prevent an audit To prevent an audit — and be ready for one just in case — do all of these things all year long: Keep at least three years' worth of records and tax returns Keep all checkbook stubs Keep all receipts and categorize them Keep and organize all bills Track cost basis for taxable investments and property Make notes about deductible items at the time In case of an audit You are entitled to a representative, such as a tax law attorney or a CPA You have the right to appeal any findings, fines, or taxes that arise from an audit Submit copies, not original documents to the IRS Do not submit anything that was not requested Many experts will tell you to be organized and cooperative. The problem is disorganization is often a trait of those being audited. Some of these people simply aren’t equipped to take on the IRS. Most common questions about surviving a tax audit Can you survive a tax audit without any receipts? David Reischer: “It might be possible for someone to survive a tax audit without any receipts if the receipts were not a significant source of revenue or expense for the individual or business. A retail business that has no cash register receipts of all income generated would have a more challenging time surviving an audit than an individual who is missing receipts for minor expenses. In short, survival of a tax audit when someone does not have any receipts will depend upon the individual tax filing.”David W. Klasing: “Yes. But, not keeping records that should be kept is a badge of fraud. Audits are prove it or lose it. Expenses can be proven to a certain extent through other methods (i.e. estimation, cancelled checks, credit card statements). IRS case law states that the IRS cannot disallow 100 percent of expenses solely over missing receipts, so the taxpayer bears the burden of proof.” What is the tax audit process? Arthur Rosatti: “The position of the tax auditor is to get the tax return correct. Their job is to review the return and determine if the information the taxpayer provides is credible. If it is, and the taxpayer can provide proof that it is credible, the auditor will accept the information. However, if the taxpayer does not have the necessary information, the auditor can disallow a portion to all of the deductions. The auditor's position is not to ‘get you’ but rather just make sure you are not cheating the system by taking deductions that you are not entitled to. Unfortunately sometimes this means that a taxpayer will get certain things disallowed because they do not have the documentation to back up what they claimed on their tax returns. I have never worked for the IRS, so I don't know the exact procedure of how an audit starts, but most cases are first flagged by their computer system. At that point an individual reviews the return and determines whether an official audit needs to be done. The examiner will send notice through the mail to the taxpayers last known address letting the taxpayer know that they have a return that is being audited. From there the taxpayer can reach out to the IRS and start the communication process, or they can go hire a professional to help them. The IRS will typically give 30 days to the taxpayer to reply to the proposed changes. From there is a back and forth between the two parties trying to come to an agreement on what will be allowed and what will not be allowed on the tax return. The entire process can be quick and take a few months, or it can drag out over a year. Sometimes the auditor will request a meeting in person to go over any documentation submitted by the taxpayer as substantiation. These meetings can be beneficial to the overall situation.” How long does a tax audit take? Susan Carlisle May: “It took about three years, but some of that I wasn't actively working the process.I received my notice of audit and then had maybe 60 days to respond. The IRS then had 30 or 45 days to respond. It took about six months for the first ruling which they disagreed with all of my business deductions. I then filed an appeal. My material was sent up the line. Months went by with me sending additional letters and support material. A decision was made. I signed the agreement and paid the additional tax. They had allowed my office deductions but not the research trips.A few months went by and I asked if I could see a written report of the decision. I was told that it was too detailed and that I wouldn't be able to understand the rules of law. I let another few months go by and decided that I had the right to see a written report whether I understood it or not. By this time I had to file through the Freedom of Information Act to get the report. That took five months because my first request was lost. After I got my report, imagine my surprise when I had no problem understanding what was written. The IRS lady didn't even know the difference between my nonfiction and fiction books. By this time I had one book published and was contracted by Harlequin.I started the appeals process which took a lot of time but I wasn't going to give up. I was in the right and I knew it. I filed with the tax court, but because I had paid my claim I couldn't go through them. So I had to do it through the regular process. I sometimes made hour long phone calls, every two months to see where my paperwork was. One year my case was closed on December 23 without ever notifying me. I reopened and went at it again. My congressman retired and I started with a new congressman's office. At one point I went to my accountant's office and had him help me figure what I should be receiving back. Finally, I read the law closely going through each link and wrote a rebuttal letter to their decision.They told me I would be getting my money back. The day it was to come in the mail I received a letter telling me I had gone over the two years and that they wouldn't be sending me the money. But I still won!” How much does it cost to hire a tax attorney, certified public accountant, or enrolled agent? Chris Cooper: “Attorneys and CPAs generally charge $250/$350 hour for this kind of representation. EA’s are generally less per hour, but not always. What the reader wants to do is interview these representatives and see if they have experience with the type of audit and the type of business the reader is in. This helps to understand the unique items of the audit of the particular business, and any special areas (such as tip inclusion rules in a restaurant).” Can you outsmart the IRS in a tax audit without hiring a tax professional? Susan Carlisle May: “The IRS can be wrong. They usually get their way because it takes so long to fight them. Read the law regarding your issue on IRS.gov. Keep clicking links until you find the answer. Don't give up if you think you are in the right — prove your case with law. Quote their stuff back to them. I won my case and they were sending my money back but it had taken over the two year time frame so I didn't get it back. But I did win without a lawyer or my accountant”. Helpful audit advice from tax experts and audit survivors David Reischer, Attorney and CEO of LegalAdvice.com “It is incumbent on an individual to ask the IRS why their tax returns were selected for an audit. The IRS may not offer a reason unless an individual asks why they are being selected for an audit. It is important to prepare for an audit by understanding the information that is to be targeted by the IRS. Therefore, inquiring about the reason for the audit is a critical first step to prepare. Most IRS notices will also contain a number in the upper right corner that will further inform the person about the reason for the audit.”Chris Cooper, California Licensed Professional Fiduciary and Founder of ChrisCooper.com “The first thing one MUST do once the taxpayer is informed that they are being audited is to hire someone to represent them before the IRS. These professionals are called enrolled agents (EA), certified public accountants (CPA) and tax attorneys. Tax preparers are NOT considered representatives, unless they have one of the above three licenses. NO ONE SHOULD EVER REPRESENT THEMSELVES IN AN ADVERSE SITUATION. Also, remember, before the IRS YOU ARE GUILTY UNTIL YOU PROVE YOUR INNOCENCE. This is very different than criminal law where the burden of proof of guilt is on the prosecutor; the IRS can just accuse you and assess you taxes, penalties and interest and it’s your job to prove you don’t owe them. This is why you NEVER, EVER REPRESENT YOURSELF. I don’t represent myself!Once you have hired your representative, then the representative will have you sign a Form 2848, Power of Attorney, which tells the IRS that this representative has permission from you, the taxpayer, to discuss your tax returns being audited with the IRS. This is also true if you are being audited by a state or local tax authority, including unemployment insurance and workers compensation taxes. Your representative will contact the auditing revenue agent and schedule time with them to start the audit. Then your representative will tell you what to get together, go over things you have and what you don’t have, and what you may be able to do about what you don’t have such as contacting third parties, such as banks, real estate title agencies, etc. to get copies from them, and what things can be reconstructed from other records, such as car repair records for business use of your car, your calendar of appointments to approximate mileage logs, and other allowable techniques.”Robert Kravitz, Audit Survivor “Turn everything over to your accountant; do not represent yourself.If you have done something seriously wrong, whether criminal or not, consult with an attorney; remember, the accountant does not have the confidentiality rights that an attorney has. As to lawyers, however, they often love handling audits and tax problems because they can make so much money on them; if you have not done anything legally wrong, let your accountant handle things. Their fees are less, this will save you money, and the audit will move along further.Work with an experienced accountant. If they have worked for the IRS at one time, they know how the game is played and this experience can help you. Try not to get emotionally involved in the audit; in my experience the toll it takes on your life can be far more detrimental than the audit itself. If you appeal an audit, get ready to wait. In my experience years ago, it took almost three years before the appeal was reviewed. I lost. It might have been better to just work out a payment plan from the start. Remember, should you owe a lot of money, you can ask the government for a compromise. Why would the government want to take less money than they can get? If they can get, for instance, $50,000 on a $75,000 tax bill now instead of it being paid off over several years, they may just accept the $50,000 and wipe the rest off the books. Once you are audited, expect the government to pull your tax return for review every year for about five years, possibly longer, just to see if you are flying right. Depending on what state you live in, your state will also abide by the IRS audit and bill you for what you may own them. In California, it is very quick. Expect a bill as soon as the audit is completed. In other states, it can take one to three years. These comments are based on my own experience owning businesses over the past 40 years and after two audits.”Arthur Rosatti, Esq. Tax Attorney at Ashley F. Morgan Law Firm “Contact your tax preparer (if you had one prepare your return). Certain people, those with more complicated returns, are at greater risk for an audit, such as people with many itemized deductions, anyone with a Schedule C, or business owners. I often recommend these people have professionals prepare their taxes to help insure the proper deductions are taken. Additionally, many tax preparers offer audit protection services for an additional fee. It is often beneficial to pay for these services if you have one of the more complicated return types.Next, you need to review your return. If you had someone prepare the return, you can review with him or her. If you prepared the return yourself, then you need to carefully see what deductions were taken. The IRS will provide you with details about what issues they have spotted on your return. Any deduction that is at issue will need support. You will need to gather things like receipts, credit card statements, bills, bank statements, etc. to substantiate any of the deductions.”Susan Carlisle May, Author and Audit Survivor “First, remember as the taxpayer the IRS works for you. Don't let them intimidate you. Individuals need to contact their congressman or woman. They have a person in their office that helps people who are being audited. Do not sign or pay until you understand and/or are completely satisfied with the decision. After you sign or pay, you have less recourse if you think the IRS is wrong. Always ask for a written explanation of the IRS decision.Don't trust that the person who does your review knows all IRS law. My lady thought I wasn't smart enough to understand the decision. Mark your calendar and call the IRS if you haven't heard from them in the time frame they stated in their letter. Also note numbers and who you spoke to. I promise you will need this information later.”
You can't be blamed for misunderstanding the tax process; the more you get behind on your taxes, the deeper the hole that you must eventually climb out of. Usually, taxpayers file late because of unrelated life difficulties. Whether it’s an unfortunate living situation, an unfortunate tax scam, family tragedy, or loss of employment, adding the IRS to your other problems can be disastrous. Tax debt relief companies like Tax Defense Partners can help dig you out of deep financial holes. So what’s the difference between Tax Defense Partners and other top tax resolution companies like Optima Tax Relief or Tax Defense Network? You should probably know the following ten things: 1. Low Fees for Some People (minimum flat fee of $500) Price depends completely on the type of service you require. Generally speaking, the more time it takes to resolve a tax debt issue, the more money it will cost. However, customers should note that Tax Defense Partners charge flat rate fees starting at $500. Depending on the tax issue you have and the resolution process you need, you may be able to save quite a bit of money by signing up with Tax Defense Partners. Ask for a free consultation from each of the top tax resolution companies to compare pricing, expertise, and services. 2. Full Representation Before the IRS The advantage of fully trained, accredited, and certified employees is that they can fully represent you before the IRS. If you go with a company that doesn’t employ enrolled agents or tax attorneys, you may always have to be present for negotiations with the IRS. Enrolled agents are authorized by the U.S. Department of the Treasury to represent taxpayers. Tax resolution companies should always employ enrolled agents and/or tax attorneys. 3. No Information on Refunds Success isn’t guaranteed when it comes to companies that handle complex tax problems, like wage garnishment, tax lien issues, tax scams, unfiled tax returns, and bank levies — that’s why it’s so important to ensure your tax resolution company is staffed with the most knowledgeable debt professionals possible. Because Tax Defense Partners can make few guarantees, it would be nice if the company provided a refund or money-back guarantee in the case of failure to handle your IRS woes. Unfortunately, Tax Defense Partners doesn’t advertise any refund policy on its site. 4. Certified and Trained Tax Professionals Every tax professional at Tax Defense Partners has been certified by the American Society of Tax Problem Solvers (ASTPS). The ASTPS trains professionals to specialize in tax services. The certification would mean that the employees at the company are all experts in their field. Though a certification from ASTPS isn’t required for companies to help with taxes, it is a nice reassurance that the company can handle any possible problem with your taxes. 5. Positive Customer Reviews Many positive customer reviews thank individual enrolled agents and tax attorneys by name. Some customers relate that employees at Tax Defense Partners were professional and courteous to their individual needs and problems. One negative customer review illustrated a less-than-ideal experience with the company, but then later recalled that Tax Defense Partners went to lengths to resolve previous customer issues. Other positive things said about Tax Defense Partners include the following: Easy to reach Responsive Answer every question Save you money on IRS payment plan Knowledge, patience, respectful attitude It’s important to know what customers are saying about Tax Defense Partners and its customer service. Take advantage of the perspective gained from both positive and negative customer reviews. 6. Negative Customer Reviews The majority of Tax Defense Partners’ negative reviews are complaints about high fees. One reviewer suggested that the company does not encrypt sensitive information sent over the internet. One negative customer review suggested that the company is quick to go back on its word once payment is made. Other negative reviews mention the following: Drawn out process Tedious process Misleading service ads Poor communication 7. Wide Variety of Services You should expect tax resolution companies to tackle cases requiring a transcript analysis, unfiled tax returns, and installment agreements. But not all companies have the expertise to deal with the breadth of services that Tax Defense Partners handles. The company also handles simpler problems as well, so if you need tax preparers or audit defense, Tax Defense Partners can handle it. The company has the expertise to adequately handle the following tax problems: Unfiled tax returns Transcript analysis Offer in compromise Wage garnishment Tax Preparation Audit Defense Bank levy Tax liens Payroll tax debt relief Installment agreement Foreign bank account reporting Audit representation PAbatementatement Collection status expiration date Full representation Innocent spouse relief Currently not collectible (CNC status) Whether you need help preparing tax returns for next year's tax season or simply want a qualified tax preparer, Tax Defense Partners can likely provide the service you need. 8. $10,000 Minimum Debt Requirement Tax debt relief companies generally have a minimum tax debt requirement. There are cases where a taxpayer owes just a few thousand dollars and can still save money through tax resolution services; however, in such cases, the tax resolution company does not usually stand to profit as much as they would when helping customers with higher tax debts. Tax Defense Partners has a minimum debt requirement of $10,000, which is just about average in the industry. Some tax relief services, like Tax Defense Network, have minimum debt requirements of $7,500 and even $5,000. Alternatively, other companies have minimum tax debt requirements of up to $20,000. 9. Highly Accredited and Featured The company is accredited by the National Association of Enrolled Agents (NAEA), the American Society of Tax Problem Solvers (ASTPS), and employs IRS certified Enrolled Agents. Accreditation organizations help regulate the industry, ensuring that taxpayers aren't being tricked out of their money by less-than-reputable tax services. It is absolutely vital that your tax relief company be accredited by at least one of the five main accreditation and certification organizations: American Society of Tax Problem Solvers (ASTPS) National Association of Enrolled Agents (NAEA) American Bar Association (ABA) American Institute of Certified Public Accountants (AICPA) National Association of Tax Professionals (NATP) Additionally, Tax Defense Partners has been featured on Forbes, The Rush Limbaugh Program, and The Sean Hannity Show. 10. Exceptional Success Stories Although business success stories from customers are usually exceptions, some of the success stories at Tax Defense Partners are astonishing. The company claims to have reduced the tax debt of one customer, with debt from a failed business, from $6,878,404 to $0. According to the story on TDP’s site, the customer had accumulated over $6 million in tax debt resulting from a failed business enterprise. TDP worked with the client to make an Offer in Compromise with the IRS. Another customer was able to reduce tax debt from $212,555 to $2,400. Potential customers should view such stories with skepticism, as companies usually advertise only their most successful cases. While such stories can help you understand the potential of certain tax relief companies, you should also research negative stories and experiences in order to see the big picture. Whether or not you decide to go with Tax Defense Partners, make sure you compare its services to the tax relief services of the best tax relief companies in the industry.
Tax Day is like an annoying cousin. Most of the year, you can avoid him, but when the family reunion comes around, you know he'll be there. You may be able to dodge him successfully at the reunion with some careful planning, but, unfortunately, there's nothing you can do to avoid Tax Day. Perhaps the most annoying part about tax season is its inevitability. No matter where you go, how long you live, or how much money you have, tax season comes for all of us. Many taxpayers find themselves in deep trouble with the IRS, either because of irresponsibility, lack of knowledge, or even just a lack of money. The most devastating aspect of tax season — the surprise of additional debt — can actually be avoided by a bit of foresight and a lot of thoughtful financial preparation. Like the line from Dante, "The arrow seen before cometh less rudely," if we prepare ourselves beforehand, we will avoid debilitating stress. Because you're worried about tax debt, you need affordable tax tools. And because you're concerned about efficiency and speed during the stressful tax season, you need useful tax tools. Here are some of the best tax tools to use before the upcoming tax deadline: IRS Tax Tools The Internal Revenue Service website provides a variety of tax tools. While they aren't as fancy or extensive as third-party tools, IRS tax tools can be extremely useful. The best part is they're absolutely free. An additional benefit to IRS tax tools is that you can be confident in their accuracy. Some of the most useful tools provided by the IRS include the following: Free File: a tool for preparing and filing your taxes online Where's My Amended Return?: a tool for tracking your amended return status Where's My Refund?: a tool that lets you track the status of your tax return View Tax Account: allows you to see your payoff amount, balance for owed taxes by year, and 18 months of payment history Direct Pay: allows you to pay your tax bill directly from your bank account. You can also pay through the IRS' mobile app, IRS2Go. There are over 15 other tools for taxpayers to use including some specifically designed for tax professionals and others made especially for business owners. The downside to using tax tools provided by the IRS is that you don't get a dedicated tax professional or help with tax issues; such services are provided by third-party tools. TaxSafe Powered by Tax Defense Network, TaxSafe is both affordable and useful and was designed to help taxpayers beyond TDN's base tax services. Very few tax tools out there provide credit, tax, and ID theft services all in one tool; this is a unique and highly useful tool in the industry. TaxSafe gives you essential protection services for not only your taxes but also monitors your credit and provides identity theft protection. With its credit services, TaxSafe allows users to keep tabs with one Bureau (TransUnion) Credit Report semi-annually, provides 24/7 credit monitoring (including an alerts system for suspicious activity), tracks your credit score, gives users the ability to freeze accounts with their credit bureau, and tracks user scores monthly. In addition to extensive tax monitoring services and its credit monitoring services, TaxSafe also provides users with ID Theft protection services including: Monitors Change of Address — an address change is a common sign of ID Theft SSN Action Alerts — monitors attempts to access sensitive personal information Data Sweeps — a scan that identifies places in which your personal information should not be (internet, dark web, financial, healthcare, and public sources) Data Breach — Alerts users in the event of applicable data breaches ID Risk Score — Alerts users when their risk score increases more than 10 percent Recovery Butler — Helps users recover/restore Personal ID information ID Theft Policy — Service is backed by a $1 million policy with a $0 deductible for a stolen identity For customers in dire financial circumstances, TaxSafe Basic does provide a free package. However, there are more extensive service options. The TaxSafe Plus package (described above) costs $22.99 per month (or $249.99 per year). TaxSafe VIP costs $27.99 per month (or $299.99 per year) and the most comprehensive TaxSafe package, TaxSafe Family, costs $34.99 per month (or $349.99 per year). TaxSlayer Though its extended services are a bit more expensive than TaxSafe, TaxSlayer can help people with simple tax returns and 1040 EZ forms for free. If you are willing to pay slightly higher prices, extended tax services include the following: E-filing Services Deduction Finder Fast W-2 Import Fast Fill Prior Year IRS Audit Assistance Free Email Support Live Phone Support Live Chat Support Priority Support Personal Tax Expert Because this tool provides assistance and expertise for tax issues specifically, it doesn't include services in credit or ID theft monitoring. However, customers may consider using this tool depending on their unique financial situation. Test the waters before jumping into any type of payment when it comes to tax tools. The aim of these tools is to save you money, so make sure you do a fair amount of comparison shopping before you commit. Try out the free versions in order to see if the extended services are worth the money.
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!