audit

10 Reasons You Should Really Fear an IRS Audit

Paul Michael — Fri, 15 Apr 2016 10:30:10 +0000

It's that time of year again. We all do our best to comply with the vast array of tax laws out there, while trying to get the deductions and rebates we're owed. But what if you make an honest mistake, or try to cheat the IRS, and get a dreaded audit? Is it really as bad as people say? Well… sometimes, it can be even worse, as these 10 reasons show.

1. The IRS Can Take Money Directly From Your Bank Account

Do not think, for one second, that the money in your bank account is safe and sound. The IRS has incredible power, and if they choose to do so, they can simply place a levy on your account and take your money. This happened to Joan Smith, a 52-year-old artist from Philadelphia. In 2010, she was preparing to go into the hospital for spinal surgery, when the IRS put a $10,000 tax lien on her account. This was, in fact, more money than she even had in the bank. And all because she did not receive an audit memo that was sent to the wrong address. It took her 11 months to dig herself out from that tax hole.

2. The IRS Now Has Six Years to Audit You

You may have been told that the IRS statute of limitations was three years from the date you filed your taxes. Not anymore. The IRS now has a series of exemptions that increase the amount of time they have to audit you. For example, if you omitted more than 25% of your income, the IRS can now hit you up six years after you filed. And, if you forgot to file certain forms, the IRS can audit you at any time in the future. Basically, 30 years from now, you could get a letter in the mail from the IRS. And if you no longer have records, you could be in trouble. Which brings us to our next point.

3. You'd Better Have Meticulous Records

If the IRS does come after you (and luckily, there's less than a 1% chance they will), they will want to examine certain records, receipts, proof of income, and anything else that may have triggered the audit. We all do our best to keep track of everything, filing it away in a safe place, and often storing copies electronically. But, if you lose some of those records, which can happen when you move, if you have a fire or burglary, or even by just misplacing them, you can wind up in real trouble. That big deduction you took for your home business? If there's no longer proof, then you can't have it. All that money you gave to charity? No receipts, no deduction. It really does pay to scan as much as you possibly can and store it on several hard drives and a cloud-based service. (See also: I Lost My Tax Documents… Now What?)

4. One Audit Can Lead to Another

So you get the dreaded audit notice. And in this case, it's not one that is handled by mail. You actually have to meet face-to-face with an auditor. Even if you are fully prepared, and have all your ducks in a row, you could say or do something that leads the IRS to audit more of your tax returns than the one in question. For instance, saying something like, "Well, I have taken that deduction before and it was fine," could lead the investigator to look into several returns, not just the one that has been flagged. In the case of an audit, you may want to look into getting some legal help.

5. Auditing Can Take Years — And Cost Thousands of Dollars

Don't think that an audit is simply a few weeks of gathering up paperwork and checking a few boxes. Audits can sometimes take years. Take the case of Tim and Tracey Kerin. Their accountant hadn't correctly evaluated their expense categories, which led to an audit. But, it didn't go smoothly. In fact, they ending up spending over 30 months battling the IRS to prove their innocence, spending over $95,000 in legal fees.

6. You Are Guilty Until Proven Innocent

Unlike the justice system, the IRS operates on the principle that if you have done something wrong on your tax return, you are guilty. You owe them money. You have to provide the paperwork to prove you are innocent, or you will face the full wrath of the system. If you cannot comply, you can literally wake up to find out your bank account has been frozen, and there's not much you can do about it.

7. If You Owe Money, the IRS Applies Penalties and Interest

So, you made a genuine mistake. You owe the IRS money. Well, you don't just owe them the unpaid taxes. You also have penalties to pay, and interest, too. As the IRS states on its website, the "penalty starts accruing the day after the tax filing due date, and will not exceed 25% of your unpaid taxes." That means if you owe $4,000, you may end up owing $5,000. Rather than incur the penalties from the IRS, find another way to pay, and get them their money quickly. You could arrange a home equity loan at a very low rate. Just get them their money, or the debt can really start to add up.

8. The IRS Can Garnish Your Wages and 401K

If you owe money, and don't have any way to pay back the sum of money owed, the IRS has the power to garnish your wages. Your employer has to comply fully with the IRS, and you will suddenly find your monthly paycheck has become smaller. Not only that, the IRS can also levy your retirement accounts, rental income, life insurance policies, or anything else of value. And this is all stated right there on the IRS website. This is a warning. If you have any doubts, ask Willie Nelson, Nicolas Cage, or Ja Rule.

9. The IRS Can Seize Anything of Value

One way or another, the IRS will get their money. If the audit reveals that you owe money, and you have no way to pay, then the IRS will start looking into your assets. If you own your vehicle, they can seize it, sell it, and apply the funds to your tax debt. Worse still, if the debt is large enough, they could actually take your home, sell it (they won't hold out for the best price), and apply that to your debt. If you do owe a large sum of money, you need to get professional advice. You do not want to be left homeless and penniless because of an IRS audit.

10. You Could Go to Prison

If worse comes to worst, you may actually find yourself behind bars. This is unlikely unless you are found guilty of major tax fraud and evasion, owing more than $100,000. But if it does happen, you have committed a federal crime and that can come with a hefty prison sentence; in some cases, up to five years. What's more, the fine could be as much as $250,000. Your whole life could be ruined, all because of a genuine mistake, an oversight, or because you put your trust in a bad accountant. When it comes to taxes, you do not want to mess around.

Do you have any IRS horror stories? Or any advice on how to deal with an audit? Please share your experiences in the comments.

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Organize Your Paperwork in Just 10 Minutes a Week

Emily Guy Birken — Wed, 30 Dec 2015 14:00:03 +0000

I am an organization nerd. Not only does the thought of going to an office supply store make me giddy, but I have been known to spend a torrid Saturday night wantonly using my label maker on everything in the house.

Despite these tidy living bona fides, for years my organizational downfall was financial paperwork.

If you find yourself in a similar state of paperwork chaos, not to worry. You can tame the beast without having to sacrifice an entire week to the project. In fact, organizing your paperwork is a job you can handle in 10 minutes a week. Here’s how:

1. Know What You Need

The first problem with financial paperwork is the fact that it can be difficult to remember how much of it you need to keep. The specter of an IRS audit is enough to turn anyone into a paperwork hoarder, but keeping everything isn’t helpful if you don’t know how to find what you need.

Before you get started, you need to know what to keep and what to toss.

The One-Year Rule

Most of your day-to-day financial paperwork, such as paycheck stubs, paid bills, bank records, and quarterly investment statements only need to hang around for a year at most. Once you’ve received your W2 and annual statement, you can shred paycheck stubs and quarterly investment statements after making sure everything is accurate. Unless your bills and bank records are needed for tax purposes, they can also be shredded after one year.

The Three-Year Rule

You have probably heard that you need to keep all tax-related paperwork for seven years, but that is actually a longer period of time than what the IRS expects of the average taxpayer. While you are stuck holding onto your annual tax returns indefinitely, the IRS doesn’t expect you keep supporting documentation (like mutual fund reports or charitable gift receipts) for more than three years. What’s special about the three-year mark? That’s the number of years Uncle Sam has to initiate an audit for regular tax returns.

Once you’ve passed three years, you can shred the records, with a couple of exceptions: First, keep documentation showing the initial purchase price of any stocks or mutual funds you own, because you will need to determine your gains or losses when it comes time to sell. And second, hold onto house records for as long as you live there (or own the place).

The Seven-Year Rule

The IRS can initiate an audit within seven years for any taxpayers who filed a claim for a loss from worthless securities or a bad debt deduction. Taxpayers who don’t include up to 25% of their reportable gross income (think servers or other employees who rely on cash tips) should hold onto their records for six years in case of an audit.

2. Start Sorting With Three Folders

Once you understand what can be kept and what can be chucked, it’s time to start organizing. The key to 10-minute organizing is the Quick Sort Method, created by Kimberlee Stokes of The Peaceful Mom. You will need three empty manila folders, labeled NOW, 10 MINUTES A WEEK, and FILE. In addition, you want to warm up your shredder for all the items that don’t go in any of these folders.

Once you have the system in place, you can leave your three folders in a standing rack right by the trashcan or shredder and sort items the moment they come in the mail.

The NOW Folder

This is where you will put any items that need immediate attention, such as bills to pay, insurance paperwork, license renewals, and the like. When you finish sorting all of your paperwork during this first sort-and-purge stint, you will go through the NOW folder and take care of everything. This will likely take you longer than 10 minutes the first time, but it will set you up to make organizing your paperwork and paying your bills much simpler down the road.

As you complete each item in the NOW folder, you can move that paper either to the FILE folder for future filing, or to the shredder. Once you have your system in place, you can put items directly in the NOW folder as you receive them, and take a minute or two each day to empty the folder.

The 10 MINUTES A WEEK Folder

This folder will house all of the items that require some sort of action on your part but don’t need immediate attention. For instance, you might put subscription renewals, paperwork that requires input from other family members, items that have no specific deadline, and the like.

Once you have taken care of the NOW items, the items in this folder will be the work that you do each week to stay on top of your paperwork and maintain your organized files.

The FILE Folder

Items that you need to file for the future will go into this folder. When you start using this system, the FILE folder will get pretty full, but eventually, you’ll find that there is nothing left in the first two folders You will spend your 10 minutes each week filing from this folder.

As for the filing, generally you will only need two systems: one for tax documents and one for general financial documents. These two systems do not need to be complex to be useful. Here is how to organize them both:

3. Organizing Tax Documents With Three Folders

Most taxpayers can easily organize their tax documents with three folders. You’ll need one each for income, expenses and deductions, and investments.

Folder for Income

If you work a single traditional job and receive electronic paystubs, you may not even need an income folder. But this is essential for those with irregular income, freelancers, contractors, people holding multiple jobs, and anyone who receives income from investments. Having this folder in place will help you keep track of every single penny you earn.

Not only should you deposit all paycheck stubs into this folder, but Dayana Yochim of The Motley Fool also recommends recording your earned income on a cover sheet in the folder, as well. This will give you method for checking the accuracy of official documents as they arrive.

Folder for Expenses and Deductions

If you’re like most people, you probably throw your receipts, statements, and paid bills into a shoebox to sort through come tax time. It’s much easier on your sanity to create an Expenses and Deductions folder with separate sections so you can be more organized throughout the year.

For instance, this folder might include sections for business, charitable donations, childcare, and medical expenses. Separating out all of your receipts for expenses and deductions will save you from those horrible moments when you cannot recall why you held onto a particular receipt.

It’s also a good idea to file a list of common tax deductions in this folder so you can easily remember what you may claim what documents you need to save.

Folder for Investments

Your Investments folder is where you will store the following paperwork:

Records proving your tax-deductible contributions to retirement accounts.
Notices of dividends, and capital gains and losses.
Distribution records you receive when you take money from investment accounts.
Annual statements.

Generally, the IRS will not need all of this paperwork for next year’s taxes, but you need this information on hand for future tax returns. For instance, if you sell an investment, you will need to be able to provide paperwork about that investment, and having it filed by year for future reference will make your life much easier.

Organize Tax Information by Year

Once you have filed your taxes each year, it’s a good idea to then create a file folder labeled with the year, where you place everything from your three tax folders. Each year, you can also go through your four-year-old (or eight-year-old) tax file folder and purge the documents that you no longer need. Remember, you should keep the actual return for each year — it’s only the supporting documents that can be shredded after the end of either three or seven years.

4. Organize General Financial Documents Alphabetically

For all of your general financial documents, the easiest filing system is the one recommended by David Allen in Getting Things Done — file your paperwork alphabetically in hanging folders. It is much easier to find the specific paperwork you need if you know to look for a cable bill under C for Comcast, rather than trying to root through a huge folder labeled Utilities.

5. Maintaining Your Paperwork Organization

Organization is a process, not an event. Creating these folders will not actually help you end the paperwork pile-up if you can’t maintain it. Here are two ways to make sure you keep up with your 10 minutes per week:

1. Put Documents Where You Naturally Store Them

We all have a tendency to let our paperwork pile up in a particular spot in our home, such as the kitchen counter or the coffee table. One of the problems with attempting to get organized is that we often try to rehome our paperwork in a “better” place than where things naturally gather, and so we spend an afternoon creating a paperwork station in the spare bedroom.

But you’re not going to schlep the mail upstairs every day after work, so don’t expect a filing system to be sustainable up there. Create a system in the place where you naturally gravitate, because it is easier to maintain a habit that is based on the way you already use your space.

2. Schedule 10 Minutes of Organization Per Week

Organizing financial paperwork is an important but not urgent task, so you can easily fall into the “I’ll just do it later” trap. The trick to keeping up with your organization is to schedule it the same way you would a meeting or conference call.

Unless you schedule a specific time and protect it from other commitments, you’re likely to lose momentum. Figure out when your 10 minutes will be spent, write it on your calendar, and keep the appointment with yourself. You’ll be glad you did.

How do you keep your important documents organized?

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Best Money Tips: Tax Audit Flags

Ashley Jacobs — Thu, 30 Jan 2014 11:00:11 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found some fantastic articles on tax audit flags, tips for lowering your heating bill, and tips for easing back into work after vacation.

Best Money Tips: IRS Audit Red Flags

Ashley Jacobs — Mon, 18 Mar 2013 11:00:35 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found some fantastic articles on IRS audit red flags, ways to spring-clean your finances, and hidden costs of DIY moving.

To Shred or Not to Shred: How Long to Keep Your Tax Records

Jeff Rose — Wed, 27 Jul 2011 10:24:05 +0000

Maybe you've heard of that seven-year rule? It says that you should keep all your receipts and records for at least seven years. That's not true in all cases, but knowing what you should keep, and how long you should keep it, can be confusing and complicated. According to the IRS website, there are no hard and fast rules on how long you should hang onto documents. Nor are there rules for how you should keep them (paper copies, online, or scanned and stored to a hard drive). You will just need to have access to them if you should ever get audited or need them for other purposes. (See also: 6 Quick Tips for Organizing Your Finances)

The Tax-Review Period

The basic period for IRS tax review is three years. Yes, that means that even if you filed your taxes this year, got your refund or paid your taxes due, the IRS can audit you for up to three years. If it is suspected that you filed a fraudulent claim, or you owe more taxes, there is a chance you could be asked to show some documentation. So a good rule of thumb is to keep everything related to your taxes for at least three years.

Special Circumstances

Outside of the three-year tax review window, there are other reasons that you could be audited or asked to show your tax documents. The length of time the IRS has to ask for these documents varies. Here are some examples:

If you goofed on reporting your income by more then 25%, the IRS can audit you and ask to see proof of income for up to six years. So it's a good idea to hang onto your tax-related documents if you think you may have under-reported your income in any way.
If you didn't file a return but should have, you need to keep your tax records indefinitely.
If you amended your tax return to get an additional refund, you should keep your tax records for three years from the date of your amended return.
If you filed a fraudulent return, there is no limit on how long you should hang onto your tax records.
If you claimed a loss from a worthless security, then you need to hold onto those records for seven years.

Other Reasons to Keep Records

Even if you don't need some of your records for IRS purposes anymore, you may want to consider if you need them for another reason before tossing them. For instance, you may need documents related to your home for insurance purposes. If you own an item or piece of property, it's a good idea to hang onto any documentation related to those items. You could find yourself needing them for a warranty or return.

It's also a good idea to hang onto your past income tax returns. There are so many programs that require proof of income, such as food stamps and medical aid assistance, and usually furnishing a past tax return is all the proof you need. It's also helpful in having past tax returns to prepare future returns.

When we decided to build our first home a few years back, our bank was a stickler about having proof of income — primarily because I had recently transitioned to the realm of the self-employed. I had to provide both proof of income as well as a recently filed tax return.

In any case, it's a good idea to hang onto all tax records for at least the three-year period that you could be audited.

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This article is from Jeff Rose of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Small Business Owners Feel High Tax Burden

Kate Lister — Thu, 21 Apr 2011 20:27:39 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/why-small-business-owners...

Have you seen the proposed new tax form?

Line 1 = Enter income from all sources
Line 2 = Send it in

This time of year, you’re probably not laughing.

A friend called in tears last week. She’d just spent a week doing tax prep work for her annual meeting with her accountant — enough to make any grown person cry. She was just about to print the final reports for her morning meeting when she noticed the puddle of ink under the printer. It was the second printer to fail in a week, the result of a leaky store-brand ink cartridge.

Lots of people are cranky this time of year thanks to our 10,000+ page tax code. A survey by the National Federation of Business (NFIB), the nation’s leading small business association, found that four of its members' top ten concerns were tax-related. Health insurance topped the list.

Another survey, just-released by the National Small Business Association (NSBA), found that more than a third of business owners (38%) spend two weeks a year dealing with federal taxes. Because of the complexity of the tax code, and fear of audit, almost nine in ten pay an outsider to prepare their returns.

The small business tax burden, both financial and administrative is overwhelming, and it’s not likely to improve any time soon. Just last month, the SBA Office of Advocacy determined that the study behind the IRS’s focus on small businesses as the nation's biggest tax cheats, was significantly flawed. And, at a time when more people are trying to earn a freelance living than at any other period in modern history — often the result of being laid off — Uncle Sam is targeting the companies that hire them, claiming they’re employees, not contractors.

Happily, one particularly egregious example of this tax-happy trend looks like it’s headed for repeal. Buried in the 2,400-page Patient Protection and Affordable Care Act that passed last year, was an expanded 1099 reporting requirement would have buried small businesses in unnecessary paperwork.

Right now businesses are required to send 1099’s to any unincorporated service provider they pay more than $600 a year. The new healthcare law would have added corporations to the 1099 hit list and it would have added payments for goods and property to the burden. That $699 iPad, for example, would mean a 1099 to Apple. For a typical small business that mails an average of sixteen year-end 1099s, the new law would increase that number eleven-fold (NSBA estimate).

What the heck is a change to 1099 reporting requirements doing in a healthcare bill anyway? Fortunately, that’s a question that NFIB, NSBA and others asked too. Thanks to their efforts, both houses of congress have called for a repeal of that part of the bill. The final nail in the coffin, the President’s signature, is expected shortly.

Small business may have won this recent battle, but with Federal, state, and local governments desperate for money, the war is far from over.

More than ever, small business owners need to stay informed about regulations, taxes, and other laws that could affect them; and they need to make their voice heard. Here’s how to do both:

Subscribe to the SBA Office of Advocacy’s Small Business Watchdog Blog or visit Advocacy’s regulatory alerts page;
Submit comments on proposed regulations to advocacy@sba.gov;
Report unfair regulatory enforcement to SBA’s Office of the National Ombudsman at ombudsman@sba.gov;
Join the National Federation of Independent Business (be sure to participate in their web site polls) and/or the National Small Business Association;
Join your industry trade association;
Tell your Congressmen and Senators what you think;
And, of course, stay tuned to American Express Open Forum.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Survive a Tax Audit

Daniel Packer — Mon, 28 Mar 2011 10:00:05 +0000

Imagine walking up to your mailbox today and finding a letter from the IRS. You filed your taxes nice and early and have eagerly been awaiting your refund check. Could this be it? Nope, it's a notice of an income tax audit. Your eyes bug out. Audit?! Isn't that only for crooks?

About 1% of all people are audited and there are some things you may have done to trigger the audit. But don't worry just yet. While scary at first, it's probably not as bad as you think and there are actions you can take do to prepare for the audit. Here is a list of ways to survive your tax audit. (See also: 6 Great Places to Get Free Tax Advice)

1. Take a Deep Breath

Unless you've knowingly deceived the IRS, you probably won't be in big trouble. The IRS is likely looking for clarification of a specific portion of your audit and the possible scenarios probably aren't as bad as you're imagining. The mostly likely bad scenario is that you'll have to pay a little more in taxes for income that accidentally went unreported or an expense that you don't have the proper documentation for. Two thirds of audits are conducted entirely by mail, so even if you're audited, you'll likely still be able to take care of this without feeling like you're on trial.

2. Read the Document Carefully

What type of audit is this? There are three types of audits, the simplest being a correspondence audit, which simply asks for clarification of some portion of your tax return (possibly the forms you submitted don't match up with what you employer or bank submitted). These can be solved over the phone or by mail.

An office audit is a bit more involved, but is still usually restricted to a specific item on your return. You'll have to go in and show proof of your numbers, but in most cases, you can do the proper research beforehand.

A field audit is conducted at the home or office and are generally only done for complicated tax filings that involve business operations. It's definitely the most invasive, but if you're not hiding anything, it can be beneficial to clear you of any wrongdoing.

Typically, only a portion of your tax return will be examined in more detail. Finding out what they are looking for will help you determine how much work you need to do and which documentation you'll need to find.

3. Respond Promptly

If you don't respond to your audit notice within 30 days, you'll lose the opportunity to defend yourself to the IRS. Then the agent will send you a bill for the amount they think you owe, and your non-response is the equivalent of agreeing with their assessment. You can get an extension, but responding to their request is a must.

4. Gather Your Documents

If they are going to question you about your deductions, you're going to need to explain how you got to a certain number and for proof of how you got there. Saying you spent about $200 in gas plus another $500 in airfare won't cut it. Get out those receipts, print those email confirmations, and build your case around irrefutable evidence. If you can't prove it, they won't accept it and you'll be left paying taxes on an extra $700 you thought you could deduct.

5. Know Your Rights

Don't go in blindly hoping for the best. Know your rights, because taking advantage of them could save you a lot of time and stress. For example, did you know you can take a sound recording of any meetings (provided you let them know in writing 10 days beforehand) and that you have a right to ask that the examination take place at a reasonable time and place that is convenient for all parties? You don't have to go running to them just to have them try and take money away from you!

6. Don't Be Afraid to Get Help

You don't have to go about this alone. If the issue isn't a simple error than you can easily fix yourself, consider hiring a tax professional with audit experience. Not only can audits cost you what the IRS feels you owe, they can also be very time consuming, so the combination sometimes means it's often better to pay someone who can give unbiased help and build a solid case for you.

While the process certainly won't be fun, the outlook probably isn't as bad as it may seem at first. As long as you're not intentionally fudging your numbers (and possibly if you are), the penalty will likely be minimal. Follow these tips and your scary experience will be a lot less nerve-wracking!

This article is from Daniel Packer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Do I Have to Report This Income?

Daniel Packer — Mon, 14 Mar 2011 11:36:11 +0000

Today we're going to play a game called "Do I Have to Report This Income?" It will teach us a little about tax filing requirements and present some interesting situations about what income is taxable and what can be left off a tax return.

When doing taxes, there are a ton of ways to get around reporting income. How can the IRS track cash transactions? Nobody will report a few items you sell online, right?

While it may be easy to hide some money from the government, there can be serious repercussions. If caught, it could cost you a lot more in the long-term. (See also: Top 10 Red Flags That Trigger IRS Audits)

So if you're one of those trustworthy folks and are trying to file your taxes properly, you should be aware of which income you have to report.

Ready to learn what you need to include as income on your taxes? The questions will get increasingly harder, but I think you will catch on fairly quickly.

1. I just received a W-2 from work. It lists all my earnings for the year. Do I have to report this income?

Definitely! Your employer sends one copy to you and sends another one to the IRS. If the amount of income from your employer that you report doesn't line up with the amount your employer reports, it will raise a red flag and you will be more likely to be audited.

2. I made about $6 in one of my savings accounts this year. I also made another $7 in a separate account. Do I have to report this income?

If you earned over $10 in a bank account, you will likely be issued a 1099-INT. However, even if you aren't issued a tax form, you are still responsible for reporting it, no matter how small. You still earned it and are therefore responsible for reporting the income.

3. I just sold a watch on eBay. They took fees out. Do I have to report this income?

While these transactions are a good way to earn some extra cash, you are still earning some income in the process, so you technically have to report it. The fees that eBay takes out are fees for using their service and have nothing to do with taxes.

4. I love my tutoring job; I get paid in cash! Do I have to report this income?

With no W-2 or 1099, there's no paper trail and that means you can just pocket the cash, right? Wrong! You are responsible for keeping your own records. In fact, you may need to make estimated quarterly tax payments! Suddenly, no paper trail really means more responsibility for you!

5. Yay! I just won a prize on a blog! Just a small gift card, but I'm super pumped! Do I have to report this income?

Congrats on your luck, but guess what? You have to count the value of the prize as income. So while you definitely come out ahead, you still have to pay taxes on that gift card. if it's a big prize, you may want to set aside some cash because you'll likely owe the government money come tax time.

By now, I'm sure you've caught on that you need to report all income you earn in any form. Hopefully I've hit on a few situations that most people don't consider, and now you'll be better prepared when filing your taxes in the coming weeks. Good luck!

This article is from Daniel Packer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Invitations to an IRS Tax Audit

Kate Lister — Mon, 10 Jan 2011 12:57:43 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/8-invitations-to-an-irs-a...

If you aren’t thinking about a tax audit, you should be. They can be a nightmare even if you’re completely honest.

Thanks to the staggering federal deficit, the IRS is trying to close the $300 billion gap between what Americans pay in taxes and what the government thinks we should have paid. You aren’t paranoid if someone is really out get you, as the saying goes, and the IRS is out to get you.

Consider this recent IRS job posting:

Internal Revenue Agent (Abusive Transactions Group)

Agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries.

This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.

But even if you aren’t wealthy, don’t operate a cash business, and you don’t have a CPA filing reams of forms for you, you still can easily become an IRS target.

Twice as many tax returns were audited in 2009 as 2000. Enforcement revenue over the same period was up 50%.

It’s important to note that in this land of equality, not all individuals or companies are treated equally when it comes their chances of an audit. About one in a hundred businesses with less than $10 million in assets is audited. That number jumps to 10 in a hundred for those with $10-$50 million in assets, and 1 in 4 for businesses with assets greater than $250 million.

Certain industries are scrutinized more heavily too. You can probably guess some of them — cash businesses are always high on the IRS hit list. But would you suspect Dr. Doggie, the vet, is a target too? It turns out the IRS has a special auditor guidebooks for veterinarians, and for ministers, laundromats, car dealers, and many others too. Their Retailer Guide offers specific strategies for interrogating e-commerce businesses, gas stations, direct sellers, mobile food vendors, pizza shops, and the like.

You can read all about how auditors are instructed to look for tax cheats in these publicly available guides. They’re not easy reading like a John Grisholm novel, but they will make the hair on your neck stand on end. Here are some "red flags" that commonly trigger an audit.

1. Math Errors

While an error in basic math might not instigate a full blown line-item audit, it’s the most common reason Americans receive those heart-attack inducing letters from their friendly local IRS office. Use a calculator and check your numbers twice.

2. Unusually High Itemized Deductions

The IRS uses a very secret formula to calculate what your deductions should be. If computer scan of your returns shows that your deductions for charity, travel and entertainment, and healthcare are out of line with your income, you’ll be on their radar.

3. Self-Employed/Schedule C Filers

Small businesses are suspected of being especially creative with their expenses. Be careful if you take a home office deduction, have lost money for several years in a row, and prepare your returns yourself rather than use an accountant.

4. Lots of 1099s

In February of 2010, in hopes of adding billions to depleted U.S. Treasury coffers, the IRS began a three-year initiative to crack down on what they believe to be a common practice of misclassifying employees as contractors.

Six thousand businesses have already been targeted for audit, and the government hopes to hire 100 new Department of Labor employees specifically to police these abuses. And yes, the do share their successes with the IRS and State authorities.

5. Unreported Income

Be especially careful to report all your income. If you’ve received a 1099, so has the IRS and their computers will notice if they don’t match up.

The same is true for other sources of income. If your former spouse reports alimony paid and you don’t report receiving it, you’ve just painted a big bull’s-eye on your tax return.

6. Previously Audited

If you’ve been audited in the past don’t think you’re off the hook — especially if you owed taxes or fines. The IRS knows people have the mistaken impression that the auditor won’t come knocking twice. But, of course, just the opposite is true.

7. Shareholder

If you are an investor in a partnership or corporation that came under the gimlet eye of the Feds, you may be next in line.

8. Pissed Someone Off

Disgruntled former employees are a regular source of IRS tips. But payback isn’t the only reason people go the IRS — the agency is authorized by law to pay rewards to informants. In cases that involve huge amounts of money, the informant’s cut can be as high as 30% of what they collect.

Make no mistake, your IRS auditor won’t be jolly.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Worried About an Audit? Six IRS Red Flags

Divine Caroline — Tue, 13 Apr 2010 22:29:20 +0000

Around February, my commute home starts to give me a knot in my stomach. That’s because my bus passes a tax-preparation shop where, as tax season draws nearer, a woman stands outside wearing a Lady Liberty costume and holding a sign that promotes the shop’s services. Oh, great, I think, it’s time to dance with the IRS again.

I don’t know why, but the idea of doing taxes terrifies me. All those forms requiring detailed numbers and asking questions I don’t quite understand — there’s so much room for error! The consequences of messing up are even more intimidating. I’ve never been audited by the IRS (knock on wood), but I can imagine it’s a nerve-wracking process. However, even crossing all my Ts and double-checking my math doesn’t guarantee an audit-free year. As a tax novice, I decided to read up on the matter, and now that I’ve done some homework, it’s clear that a few factors make the IRS more likely to pay extra attention to your tax papers.

1. Making Too Many Errors

According to Jeff Schnepper, a writer for MSN Money, one of the most common reasons tax forms get scrutinized is that they’re riddled with math errors, incorrect spelling, typos, and so forth. The first line of defense against an audit is not giving the IRS a reason to look twice. Remember that the IRS receives financial records from your bank and anyone you’ve earned a paycheck from, so make sure that you’re providing that same information — numbers that don’t match up are suspicious.

2. Being Self-Employed

Sorry, owners of small businesses and freelancers — the IRS tends to look closely at your information. First, it needs proof that you’re running a for-profit operation, not a hobby. Second, it wants to make sure that you’re reporting income accurately and that the small-business deductions you take are accurate and fair (i.e., not claiming personal expenses as business write-offs). Also, if your company’s taken a significant financial hit, that sets off a mini-alarm for the IRS, since it’s possible that you’ve been misrepresenting figures. Sandra Block, a writer for USA Today who covered this topic in 2000, recommends providing an explanation, along with tax papers, to avoid raising any red flags.

3. Not Fitting the Mold

The IRS uses a computer program called the Unreported Income Discrimination Function System to compare each person’s tax deductions and credits against what the IRS has determined is average for certain income brackets. If your DIF score is considerably different from that of others in your category — as in, you earn $60,000 a year but reported a $40,000 charitable deduction — that’s a big IRS red flag, as CNNMoney.com staff writer Christian Zappone described in 2007. The program’s main purpose is to scout out individuals who’re most likely to owe more money after further analysis.

4. Earning Six Figures or More

Back in the day, a common complaint come tax season was that the rich were somewhat protected from audits. But these days, the IRS is more concerned with lowering the country’s astounding tax gap (the difference between taxes owed and taxes paid). “If you’re a millionaire, you’re a lot more likely to hear from the IRS than taxpayers in any other income bracket,” IRS spokesman Terry Lemons told the Wall Street Journal in 2009.

5. Claiming Home Office and Job Expense Deductions

The problem with both of these deductions is that too many people claim them for inappropriate reasons. A home office isn’t just a room that you happen to work in once in a while. And when it comes to job expenses, there’d better be a good reason why your bosses didn’t reimburse you in the first place, so it’s an iffy deduction right off the bat. There are detailed rules for deductions, so unless you want a tax tangle in the future, don’t claim anything unless you know it’s right.

6. Making Enemies

The IRS’s computer program triggers many audits, but some come courtesy of tipsters — including individuals, media sources, and public records — reporting potentially faulty tax returns. “The Examination Process,” an explanation of auditing on the IRS’s Web site, lists “information from compliance projects that indicates a return may have incorrect amounts” as one of the reasons for extra examination.

One Potential Solution: Protecting Yourself with Paperwork

Luckily, there are steps you can take to protect yourself if you fall into one of these categories. The best means of self-defense is a thorough record that backs up your claims. Keep receipts, bank statements, and all pertinent paperwork that proves that what you put on your tax forms is true. The book What the IRS Doesn’t Want You to Know details how long you should hold on to these records:

Businesses should keep receipts and bills for purchases for four years, accounting books and bank statements for six, and tax returns for ten.
For personal items, hang on to receipts and bills for four years, bank statements for six, and tax returns forever.

The IRS has up to three years after you’ve filed to audit, so keep that in mind when spring cleaning your office. It may feel silly to save a receipt from two years ago, but if it relates to a suspicious deduction you’ve claimed, it’ll come in handy if the IRS comes knocking.

Information is power when it comes to protecting yourself from an audit. If you recognize that there are factors that set you apart from the average taxpayer, send in tax forms with an explanation of the situation, via either a note or paperwork that serves as evidence. However, there’s such a thing as giving away too much information that the IRS didn’t ask for, and that can slow down return processing. If you feel that your tax information could lead to an audit, take your return directly to a tax-preparation professional’s office before you fill out any forms on your own. You may think dealing with a professional is too much of a hassle, but it’s a far friendlier alternative than a stand-off with an IRS auditor.

Guest Post Blurb:

This guest article is a contribution from Vicki Santillano of Divine Caroline. Find more great articles from Vicki:

This article is from Divine Caroline of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Ring. Ring. Ka-ching! Lying About Your Telephone Tax

Troy Hadley — Thu, 29 Mar 2007 00:07:19 +0000

I haven't had a landline in years. I'm dead serious. Years.

So, I was bummed to hear that this year, the "sorry you were cheated initially when we taxed you too much" refund that we get back is for long distance telephone service.

Apparently, Americans who paid for long distance calling plans were cheated or something. By Ma Bell? Or the Baby Bells? Uncle Sam in conjunction with the Bell Family? It doesn't matter now. What matters is that, when you file your taxes this year, you can get back between $30 and $60, depending on the number of exemptions you claim.

Whoop-tee-doo. Thanks, Uncle Sam. I've been using only my pay-as-you-go cell phone for years, carefully tracking my usage, and this is how you repay my mobile monetary frugality?

Now, it's true that some cell phone plans do qualify for the tax refund (thanks, Clever Dude). It just so happens that mine does not. I never paid this tax, and thus, I don't qualify.

However, a friend of mine who works for H&R Block told me that anyone can pretty much claim this refund. Because the IRS isn't going to audit it. Which is awesome, because I already filed my taxes, and I didn't claim it, because I was sure that somehow, THE IRS WOULD KNOW.

It turns out that they don't really care. So, go ahead, claim it, even if you are an off-the-grid type who doesn't even HAVE a phone. Just don't get too greedy, or they might decide not to pay everyone their $60.

Some of you may ask if I am advocating that people cheat on their taxes. And yes, I guess I am. Just a little. Most people qualify for this refund, but those who don't might as well go ahead and try to get it, too.

I'm putting the "bread" in Wise Bread. Not necessarily the "wise", though.

This article is from Troy Hadley of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

audit

10 Reasons You Should Really Fear an IRS Audit

1. The IRS Can Take Money Directly From Your Bank Account

2. The IRS Now Has Six Years to Audit You

3. You'd Better Have Meticulous Records

4. One Audit Can Lead to Another

5. Auditing Can Take Years — And Cost Thousands of Dollars

6. You Are Guilty Until Proven Innocent

7. If You Owe Money, the IRS Applies Penalties and Interest

8. The IRS Can Garnish Your Wages and 401K

9. The IRS Can Seize Anything of Value

10. You Could Go to Prison

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How to Organize Your Paperwork in Just 10 Minutes a Week

1. Know What You Need

The One-Year Rule

The Three-Year Rule

The Seven-Year Rule

2. Start Sorting With Three Folders

The NOW Folder

The 10 MINUTES A WEEK Folder

The FILE Folder

3. Organizing Tax Documents With Three Folders

Folder for Income

Folder for Expenses and Deductions

Folder for Investments

Organize Tax Information by Year

4. Organize General Financial Documents Alphabetically

5. Maintaining Your Paperwork Organization

1. Put Documents Where You Naturally Store Them

2. Schedule 10 Minutes of Organization Per Week

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Best Money Tips: Tax Audit Flags

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Best Money Tips: IRS Audit Red Flags

Top 5 Articles

Other Essential Reading

To Shred or Not to Shred: How Long to Keep Your Tax Records

The Tax-Review Period

Special Circumstances

Other Reasons to Keep Records

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Why Small Business Owners Feel High Tax Burden

How to Survive a Tax Audit

1. Take a Deep Breath

2. Read the Document Carefully

3. Respond Promptly

4. Gather Your Documents

5. Know Your Rights

6. Don't Be Afraid to Get Help

Do I Have to Report This Income?

1. I just received a W-2 from work. It lists all my earnings for the year. Do I have to report this income?

2. I made about $6 in one of my savings accounts this year. I also made another $7 in a separate account. Do I have to report this income?

3. I just sold a watch on eBay. They took fees out. Do I have to report this income?

4. I love my tutoring job; I get paid in cash! Do I have to report this income?

5. Yay! I just won a prize on a blog! Just a small gift card, but I'm super pumped! Do I have to report this income?

8 Invitations to an IRS Tax Audit

1. Math Errors

2. Unusually High Itemized Deductions

3. Self-Employed/Schedule C Filers

4. Lots of 1099s

5. Unreported Income

6. Previously Audited

7. Shareholder

8. Pissed Someone Off

Worried About an Audit? Six IRS Red Flags

Ring. Ring. Ka-ching! Lying About Your Telephone Tax