Tag Archives: tax return

What You Need To Know About IRS Audits

The IRS recently released its 2018 Data Book, including information on its audit activities for the last fiscal year. This infographic details what you need to know regarding your audit risk, how to prepare for and what to expect in an IRS audit.

 

Best Way to Avoid an IRS Audit: Preparation

Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS’s gaze if you make one of several common mistakes.

That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:

Don’t leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.

Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people’s calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.

Don’t stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.

Have your documentation in order. Be meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.

Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you’ve filed.

IRS Changes That May Delay Your Early Refund

In an effort to reduce the amount of money paid to identity thieves who file fraudulent returns, the IRS will be implementing changes in the timing and way they handle the processing of tax returns.

These steps will continue to evolve, but recent changes will impact millions who depend on receiving an early refund.

Earlier filing of form W-2s and 1099-MISC – The timing required to send these forms to employees and vendors remains the end of January. However, the extended deadline for filing the electronic version of these forms to the IRS and Social Security Administration is now a full month earlier. This is done to allow the IRS to match records with early filed tax returns. The prior timing gap was ideal for thieves to file fraudulent tax returns.

Earned Income Tax Credit and Additional Child Tax Credit – If you file a tax return that contains either of these credits, do not expect to receive an early refund. The IRS has been mandated to hold these refund payments until February 15th or later. Given the payment backlog this will create, it is still important to file early to get your refund in the queue.

Begin planning now to be prepared for these upcoming changes. Rest assured, we can all look forward to further changes as the IRS continues to address the multi-billion dollar identity theft problem plaguing the Agency.

Twelve Common Snags to Finalizing Your Tax Return – Part 2

Last week we gave you the first half of a list of items that are often overlooked that cause trouble in filing a timely tax return.  Here’s the second half of the list!

Name mismatch – If you’ve recently married or divorced, make sure your last name on your tax return matches the one on file at the Social Security Administration.

Inconsistent information – Most tax preparation software will check a tax return for inconsistencies. The message “Diagnostic Error!” will make you cringe. When one occurs, they must be resolved prior to filing your tax return. An example might be you filing Married Filing Separate, while your soon-to-be ex-spouse files as Married Filing Joint or Single.

No information for a common deduction – If you claim a deduction, you will need to provide support to document the claim.

Missing cost information for transactions – Brokers send out their statements with the sales transactions. You will need to also provide the cost and purchase information (cost basis) or the tax return cannot be filed.

Missing K-1 – If you have ownership of a partnership, Sub Chapter S or LLC, you should receive a Form K-1 that reports your share of the profit or loss from the business activity.  Without this K-1, you cannot file your tax return.

Forms with no explanation – If you receive a tax form, but have no explanation for the form, questions arise.  For instance, if you receive a retirement account distribution form, it may be deemed income. If it is part of a qualified rollover, no tax is due.  An explanation is required to file your information correctly.

Hopefully, by knowing these common missing pieces of information, you can prepare to have your tax filing process a smooth one!

1099 Filing Requirements

Another year has come to an end and we would like to take the time to remind you of Form 1099 reporting requirements and changes to filing deadlines.

Certain payments made in the course of business are required to be reported on the appropriate Form 1099.  The type of 1099 filed depends on the type and amount of the business expenditure.  Some of the most common expenditures requiring a 1099 are listed below:

Payments for: Equal to or Exceeding: Form:
Dividends $  10 1099-DIV
Interest (generally) $  10 1099-INT
Royalties $  10 1099-MISC
Liquidating distributions $600 1099-DIV
Interest (paid in the course of business) $600 1099-INT
Fees paid for services $600 1099-MISC
Commissions $600 1099-MISC
Prizes and awards $600 1099-MISC
Rents $600 1099-MISC

Note: Generally, payments made to a corporation are not required to be reported on a form 1099.  However, there are some exceptions such as attorney fees.

A copy of the 1099 is required to be postmarked to the recipient and the IRS by January 31, 2017. Failure to correctly file the required 1099’s within the due dates can result in penalties of up to $260 per return (based on when filed) with a maximum of $1,059,500 for each year.

In addition to the above mentioned requirements, business taxpayers will be required to answer two questions on their 2016 income tax returns: (1) Did you make any payments in 2016 that would require you to file Form 1099(s)? (2) If yes, did you file the required Form 1099(s)?

In order to properly fill out the required forms, you will need to obtain information from each person to whom you make qualifying payments. Form W-9 is used for this purpose and can be obtained by going to http://www.irs.gov/pub/irs-pdf/fw9.pdf.

The information above relates to the most common types of transactions and circumstances.

Twelve Common Snags to Finalizing Your Tax Return – Part 1

The goal for every taxpayer is to have their return filed quickly and without error.  Here’s the first half of a handy list of items that are often overlooked and can cause all sorts of delays.

Review your tax return and return your signed eFile forms – Your tax returns can’t be filed until you have reviewed them and returned the signed eFile forms to your preparer. The sooner you do this, the sooner you’re filed.

Having proof of health insurance – You should receive a Form 1095 confirming you have health insurance. However, if your employer is one of those that received approval to send a delayed form, you still need to provide your preparer with proof of insurance before filing.

Missing W-2 and/or 1099 – One missing income form and the next thing you know, you’re paying to file an amended. Using last year’s tax return, or a tax organizer provided by your preparer, make sure all prior W-2’s and 1099’s are received and provided to your tax preparer.

Incorrect information on a W-2 or 1099 – Always double-check your forms to make sure the information is accurate – one wrong spelling of a name or one digit off on your SSN and the filing process comes to a screeching halt. Make sure 1099 income is in the correct box. Are you receiving rents and receive a 1099-MISC with the amount in the Non-Employee Compensation box? Then you face a choice – either try to get the form corrected or delay filing your tax return.

Missing or invalid Social Security Number – This one is sort of a given – if you don’t have a valid SSN, there will be no tax filing.

Dependent already claimed – Share joint custody of a child? Or, did your college student think they could file claiming themselves? Your return cannot be filed if there is a conflict in this area. Make sure it’s clear who gets to claim the dependents in your life.

Look for the second part of this article next week!

The IRS is Not Always Right

Quotes from actual IRS correspondence received by clients:

“Our records show we received a 1040X… for the tax year listed above, We’re sorry, but we cannot find it.”

“Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken.”

“Payment is due on your account. Please submit payments on or before June 31st to avoid late payment penalties and interest.”

It’s pretty tough to pay a balance due of $0 on June 31st when June only has 30 days. The message should be clear. If you receive a notice from the IRS do not automatically assume it is correct and submit payment to make it go away. The same is true for any state notices. They are often in error. So what should you do?

Stay calm – Try not to overreact to the correspondence. This is easier said than done, but remember the IRS sends out millions of notices each year. The vast majority of them correct simple oversights or common filing errors.

Open the envelope – You would be surprised at how often clients are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category try to remember that the first step in making the problem go away is to open the correspondence.

Careful review – Review the letter. Make sure you understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with their findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but it sometimes happens.

Respond timely – The correspondence received should be very clear about what action the IRS believes you should take and within what timeframe. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.

Get help – You are not alone. Getting assistance from someone who deals with this all the time makes going through the process much smoother.

Correct the IRS error – Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence errors. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.

Certified mail is your friend – Any responses to the IRS should be sent via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest on your tax bill.

Don’t assume it will go away – Until a definitive confirmation that the problem has been resolved is received, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up will be required.

Protect Yourself from Identity Theft and Fraud

Imagine this – you’ve given us all your documents early, we’ve prepped and processed your tax return, you’ve reviewed it and signed the eFile forms… then we call you and advise you that your tax return rejected eFiling because someone has already filed using your social security number! Sadly, this can happen if you become one of the growing number of victims of tax return identity theft. At least one estimate shows tax-related identity theft cases have increased 650% since 2008. Identity theft can delay your tax refund, but other consequences could be credit card debt or loans taken out in your name.

To avoid becoming a victim, we recommend the following:

  • Safeguard your social security number and other financial information. Don’t send financial documents via email unless you use an encryption program. To send documents to us, use our LeapFile application to securely send us documentation.
  • Check your bank and credit card transactions regularly and monitor your credit ratings.
  • Don’t give out your information on the phone, even if the caller identifies themselves as an agent of the IRS or other authorities.