Oops. . . Don’t Do It Again Your Tax No-no’s
You do not learn some things in school about tax preperation. I know I had to learn more than what was taught to me in senior year of high school. Granted, yes, the information I learned was valuable. Nevertheless, what my teacher never mentioned (he was our math teacher) was the things you should not do in regards to taxes. So I would like to share some helpful information about tax no-no’s. Some of them you already know and some that you may not know.
“The truth of the matter is that the law is complex and not easy to understand . . . The IRS claims that the average tax return self-prepared will pick an individual 21 ½ hours to complete. This includes information gathering and understanding and preparing the return,” says Veteran CPA Steve Duben.
This is one of the reasons I have my taxes done for me.
Duben cites a list of the most approved tax mistakes encountered.
The following subjects will be briefed: protecting yourself from an audit, what income you shouldn’t forget to narrate, accounting business expenses, 2009 information, other peoples expenses, medical, interest and mortgages, charitable giving, “time donation”, unclaimed reimbursement, mileage without records, dependents, social security numbers, new-home credits, filing status’, and your W-2.
There is a lot of ground to cover, so I will try to make it short, sweet, and to the point.
1. Protect Yourself From an Audit:
How the IRS audits:
The IRS examines tax returns to verify that the tax reported is right.
Selecting a return for examination does not pin point you, the taxpayer, as either the subject of error or being dishonest. Truth is select examinations result in a refund to the taxpayer or recognition of the return without change.
The submerging mainstream of taxpayers files returns and make payments timely and accurately. Taxpayers have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid.
This is why I trust my tax company when they prepare my taxes and say that if anything happens in the process that they are liable to the cause.
The following information is provided by the IRS website.
Taxpayer Rights: The IRS trains its employees to explain and protect taxpayers’ rights throughout their contacts with taxpayers. These rights include:
A right to professional and courteous treatment by IRS employees.
A right to privacy and confidentiality about tax matters.
A good to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
A proper to representation, by oneself or an authorized representative.
A right to appeal disagreements, both within the IRS and before the courts.
How Returns Are Selected for Examination: The IRS selects returns using a variety of methods, including:
Potential participants in abusive tax avoidance transactions – some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
Computer Scoring – some returns are selected for examination based on computer scoring. Computer programs give each return numeric “scores”. The Discriminate Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel cover the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
Large Corporations – the IRS examines many mountainous corporate returns annually.
Information Matching – some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.
Related Examinations – Returns are selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns are selected for examination.
Other – State offices may identify returns for examination in connection with local compliance projects. These projects require higher-level management approval and deal with areas such as local compliance initiatives, return preparers or specific market segments.
Examination Methods: A questioning may be conducted by mail or through an in-person interview and review of the taxpayer’s records. The meeting may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or at an accountant’s office (field audit). Taxpayers are allowed beget audio recordings of interviews, provided they give the IRS an advanced notice. If the time, spot, or design that the IRS schedules is not convenient, the taxpayer may request a change, including a change to another IRS office if the taxpayer has moved or business records are there.
The audit notification letter that you receive informs you which records will be needed. Taxpayers may act on their own behalf or have someone speak for or accompany them. If the taxpayer is not show, the proxy must have proper written authorization. The auditor will explain the reason for any proposed changes. Most taxpayers agree to the changes and the audit ends.
Appeal Rights: the examiner at the beginning of each audit explains Appeal Rights. If you do not agree with the affirmed changes may appeal by having an administrative conference with the examiner’s manager or appeal their case authoritatively within the IRS, to the U.S. Tax Court, U.S. Claims Court or the local U.S. District Court. If no agreement can be made at the closing of the conference with the examiner or the examiner’s manager, the taxpayer has 30 days to consider the proposed adjustments and their next course of action. No response within 30 days, the IRS issues a sanctioned survey of omission, which gives the taxpayer 90 days to file a petition to the Tax Court. The Claims Court and District Court typically do not hear tax cases until after the tax is paid and administrative refund the IRS has denied claims. The tax does not have to be paid to appeal within the IRS or to the Tax Court. A case may be further appealed to the U.S. Court of Appeals or to the Supreme Court, if those courts accept the case.
– http://www.irs.gov/newsroom/article/0,,id=151888,00.html
2. Forgetting to Report All Income: Even side jobs count when it comes to taxes. As I have said too many others, you do not even have to have made $600 from a freelance or side job to claim it on your taxes. Its detached income earned. You still need to report that income in your 2009 return and any other return there after.
“Some taxpayers feel that if they did not procure a 1099 produce then they do not have to recount income received,” Duben said. “The IRS has a long arm and seems to know what was and was not reported. To avoid this steal your time and review all sources of income.”
What is the penalty if you do not describe all income? Duben says “The cost, besides the tax will be interest at 6% per year and penalties of up to 20%.”
Reporting Misc. Income: While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many do not realize that they must also report most other income, such as:
cash earned from side jobs,
barter exchanges of goods or services,
awards, prizes, contest winnings and
Gambling proceeds.
This fact sheet, the 18th in the Tax Gap series, will help taxpayers better comprehend miscellaneous income and what they are asked to report as taxable on their Form 1040.
The tax gap, or the amount of taxes that go unpaid each year, stems from taxpayers not reporting their taxable income. Remarkably, most people want to pay their fair share of taxes and many simply need a thorough notion of their responsibilities.
What is Taxable?
Taxpayers must report all income from any source and any country unless it is specificly absolved under the U.S. tax code. There may be taxable income from particular transactions even if no money changes hands.
The IRS acknowledges all income received in the form of money, property or services to be taxable income lest the law indicatively allows an exemption. The following document discusses a few types of reportable income. Information on how to record other types of income can be found in Publication 525, Taxable and Nontaxable Income.
Self-Employment Income
It is a recurrent misunderstanding that if a taxpayer does not receive a Build 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount may be dismissed from gross income.
All income earned through the taxpayer’s business, as an independent contractor or from every day side jobs is self-employment income, which is taxable and must be reported on Form 1040.
Use Form 1040, Schedule C, Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship) to report income and expenses. Taxpayers will also need to prepare Form 1040 Schedule SE for self-employment taxes if the net profit exceeds $400 for a year. Do not report this income on Form 1040 Line 21 as Other Income.
Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not convey a Form 1099-MISC, the unspecified income amount is quiet reportable by the taxpayer.
Fees received for babysitting, housecleaning and lawn cutting are all embodiments of taxable income, even if each client paid less than $600 for the year. Anyone who restores computers in his or her leisure time has to show all monies earned as self-employment income even if no one person paid more the equal amount mentioned above for other services.
In bartering, the fair market value of goods and services exchanged is taxable and must be included on Form 1040 in the income of both parties.
Gambling winnings lotteries, raffles, horse races, poker tournaments and casinos are taxable and must be reported on Form 1040. As well as the blooming market value of prizes such as cars and trips. In addition, taxpayers may be required to pay an estimated tax on the gambling winnings.
Losses may be deducted only if the taxpayer lists deductions and only if he or she has gambling winnings that are not more than the gambling income noted on the return.
http://www.irs.gov/newsroom/article/0,,id=175963,00.html
3. Accounting for Business Expenses: “Business expenses need to be ordinary and necessary for the business. Taxpayers should also be able to substantiate the expenses and their business purpose if asked by the IRS or other taxing agency. If the expenses cannot be substantiated then they will be disallowed upon audit and … the cost will include the tax, interest and possible penalties,” Duben says.
A business expense must be both ordinary (accepted in your trade or business) and necessary (helpful and appropriate for your trade or business).
It is considerable to separate business expenses from the following expenses:
The expenses used to figure the cost of goods sold: The cost of products or raw materials, including freight; storage, lisp labor costs (including contributions to pensions or annuity plans) for workers who produce the products; and factory overhead.
Capital Expenses: Business start-up cost, business assets, and improvements. And,
Personal Expenses: Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business portion. Such expenses include business spend of your home, business spend of your car, employees’ pay, retirement plans, rent expense, interest, taxes, and insurance.
This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.
Under the uniform capitalization rules, you must capitalize the direct costs and share of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you collect for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.
Note: You can elect to deduct or amortize determined business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.
http://www.irs.gov/businesses/small/article/0,,id=109807,00.html
4. It has to be from 2009: Duben says “Any deduction to be deducted on an individual’s tax return needs to be paid (or charged on a credit card) during the tax year.”
Next time, wait until Jan. 1 to book that flight.
5. Paying for Other People’s Expenses: “Some taxpayers consider payments of expenses for another as their expense. The law only allows one to deduct his/her expense,” Duben says.
6. Report Medical Expenses Net of Reimbursement: In IRS Publication 502, it states, “You cannot include medical expenses that were paid by insurance companies or other sources. This is just whether the payments were made directly to you, to the patient, or to the provider of the medical services.”
I was curious to know what you can and cannot deduct when it comes to medical expenses. The information I found was too much to even add to this article so I am letting you have all the fun in reading the material and the how-to’s that are provided by the IRS at http://www.irs.gov/publications/p502/ar02.html#en_US_publink1000178852 examples and snippets of forms are provided. It may be something that you will want to print out completely. The information might make you cross-eyed, so be warned.
7. Deducting Interest on Million-Dollar Mortgages: Duben describes, “Interest on one’s home is limited to loans of $1.1 million – any interest on a loan over this amount is not deductible.”
Here, too, I found loads worth of information about deducting home loans. Therefore, I have supplied you with a link to the webpage. http://www.irs.gov/publications/p936/ar02.html
8. Forgetting to Withhold Track of Charitable Giving: Receipts, receipts, receipts. As Duben explains, “Contributions over $200 require a letter from the charity to substantiate the deduction. Contributions in which something is received such as a dinner or merchandise can only be deducted to the extent the contribution exceeds the fair market value of goods or services received.”
Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A.
To be deductible, charitable contributions should be made to qualified organizations. See Publication 526, Charitable Contributions.
If your offering accredits you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit obtained. Donations of cash, check, or other monetary gift (regardless of amount), maintain a record of the generosity either by bank record or a written communication from the qualified organization describing the date and amount of the contribution and the name of the organization. You generally can deduct the fair market value of any property you donate, as well as your cash contributions, to qualified organizations. See Publication 561, Determining the Value of Donated Property. For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a co-existent written acknowledgment from the qualified organization noting the amount of the cash and a definition of any property given, and whether the organization supply any goods or services in exchange for the gift.
You must fill out Form 8283, and attach it to your return granted that your total deduction for all non-cash contributions is more than $500. If you claim a deduction for a contribution of non-cash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of non-cash property worth more than $5,000, you will need a qualified appraisal of the non-cash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of non-cash property worth more than $5,000,000, you will also need to set aside the respectable appraisal to your return.
For more information, refer to Produce 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining value, refer to Publication 561, Determining the Value of Donated Property.
http://www.irs.gov/taxtopics/tc506.html
9. Trying to Deduct Your “Time Donation”: Duben says that donating your own time does not create a deduction for the value of the time donated.
The IRS and Treasury have released proposed regulations (PR) regarding Type III supporting organizations that reflect changes to the law made by the Pension Protection Act of 2006. The advised codes decree a payout condition for non-functionally in merged Type III supporting organizations and expound functionally integrated Type III supporting organizations, which are not held to the payout requirement.
http://www.irs.gov/charities/charitable/article/0,,id=213544,00.html
10. Not Taking a Reimbursement, Then Wanting to Deduct It: “Employee-related expenses can be deducted if they are related to employment, required by the employer and not reimbursed or reimbursable. Not claiming a reimbursement from the employer if it is available does not create a tax deductible expense,” Duben said.
There are two deductible types of reimbursements. Moving and business.
Here is a link to the absorbing expenses, http://www.irs.gov/publications/p521/ar02.html#en_US_publink1000203511
In addition, here is the link for business expenses, http://www.irs.gov/publications/p535/ch11.html#en_US_publink1000144889
11. Deducting Mileage Without Records: Duben says it very simply: “Auto mileage needs to have a log to substantiate the amount claimed.”
IR-2008-131, Nov. 24, 2008
WASHINGTON – The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or lively purposes.
Beginning on Jan. 1, 2009, the standard mileage rates for the exercise of a car (also vans, pickups or panel trucks) will be:
55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
A taxpayer cannot use the business standard mileage rate for a vehicle after using any accounting allowance method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. Furthermore, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used concurrently.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Revenue Procedure 2008-72 contains additional information on these standard mileage rates.
You can get a booklet from a tax preparation company that can help you log all your information. Also, keep all your receipts. I am trying to accept my husband to sustain better track for this as he does do delivery.
12. Claiming a “Dependent”: If you want to claim a dependent on your taxes this year, but you are not sure if the person fits the description, gain obvious you visit the IRS Web residence or ask a professional tax preparer. The IRS site has a good tutorial on the ins and outs of who counts as a dependent.
Once again, lengthy information, here is a link to the PDF through the IRS website: http://www.irs.gov/pub/irs-pdf/p503.pdf
13. Using the Unpleasant Social Security Number: When you file, do not forget to double-check the form before you submit it by mail or online otherwise you could be questioned.
14. Claiming New-Home Credits Too Early: To make sure you get credit for that fresh home you just bought, you need to have closed security before Jan. 1, 2010 or to claim it in the following year.
15. Using the Wrong Filing Status: Look over your forms before you send them in.
16. Not Turning in Your W-2: Duben says this simple error could waste a lot of time. “Any of the above mistakes will cost additional taxes plus interest and possibly penalties. If a taxpayer is waiting for a refund, the above errors can delay the refund for as long as it takes to correct the error. I have seen cases where it takes over a year to get things corrected.”
Your W-2 is vitally principal.
http://finance.yahoo.com/taxes/article/108682/most-common-tax-mistakes? mod=taxes-advice_strategy
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