Sleuthing your way through a tax audit by yourself is not the same as fixing a leaky faucet or changing your oil. Here are reasons you should seek professional help as soon as you receive a letter from the IRS:
IRS auditors do this for a living — you don’t. Seasoned IRS agents have seen your situation many times and know the rules better than you. Even worse, they are under no obligation to teach you the rules. Just like a defendant needs the help of a lawyer in court, you need someone in your corner that knows your rights and understands the correct tax code to apply in correspondence with the IRS.
Insufficient records will cost you. When selected for an audit, the IRS will typically make a written request for specific documents they want to see. The list may include receipts, bills, legal documents, loan agreements and other records. If you are missing something from the list, things get dicey. It may be possible to reconstruct some of your records, but you might have to rely on a good explanation to avoid additional taxes plus a possible 20 percent negligence penalty.
Too much information can add audit risk. While most audits are limited in scope, the IRS agent has the authority to increase that scope based on what they find in their original analysis. That means that if they find a document or hear something you say that sounds suspicious, they can extend the audit to additional areas. Being prepared with the proper support and concise, smart answers to their questions is the best approach to limiting further audit risk.
Missing an audit deadline can lead to trouble. When you receive the original audit request, it will include a response deadline (typically 30 days). If you miss the deadline, the IRS will change your tax return using their interpretation of findings, not yours. This typically means assessing new taxes, interest and penalties. If you wish your point of view to be heard — get help right away to prepare a plan and manage the IRS deadlines.
Relying on an expert gives you peace of mind. Tax audits are never fun, but they don’t have to be pull-your-hair-out stressful. Together, we can map out a plan and take it step-by-step to ensure the best possible outcome. You’ll rest easy knowing your audit situation is being handled by someone with the proper expertise that also has your best interests in mind.
The recent college admission scandal involving Lori Loughlin (who played Aunt Becky in the Full House TV series) and others is shedding light on just one way people allegedly cheat on their taxes. Here are examples of some famous people in tax trouble with the IRS and helpful hints to make sure it doesn’t happen to you:
Lori Loughlin and questionable charitable donations. In this case, the IRS would investigate whether payments deducted as charitable contributions on her tax return were really charitable contributions. Regardless of how the legal charges shake out, Loughlin is looking at a large tax bill if the charity she contributed to is stripped of their non-profit status.Helpful hint: Charitable giving must be to legitimate charitable organizations, for legitimate purposes, and must be reduced by any value received in return.
Al Capone and his illegal earnings. After years of bribing and wriggling his way out of violent crime charges, Capone was charged with 22 counts of tax evasion for not reporting income on illegal activities. He was sentenced to 11 years in prison – some of which were served at Alcatraz Federal Penitentiary in San Francisco.Helpful hint: ALL income – even if obtained illegally – is taxable.
Wesley Snipes decided not to file his taxes. In 2008, actor Snipes was convicted for not filing tax returns from 1999 to 2001. Among his many arguments, Snipes used the tax protester theory claiming domestic income is not taxable. After jail time, Snipes’ offer in compromise to lower his $23 million tax bill request was shot down by the IRS.Helpful hint: Exotic tax schemes are actively monitored by the IRS. If it seems to good to be true, it probably is too good to be true and requires a second opinion.
Leona Helmsley faked her business expenses. Helmsley, A famous real estate mogul in the 1980s, had more than $8 million of renovations to her private home billed to one of her hotels so she could deduct the expense on her taxes. After being convicted, Helmsey had to pay back the $8 million and served 18 months in prison.Helpful hint: Separate business expenses from personal expenses. Open separate bank accounts and never intermingle expenses. The IRS is quick to disallow deductions when personal expenses and business expenses are mixed together.
Pete Rose hid his “likeness” income. Many famous athletes go on to sell autographs, memorabilia and get paid for appearances after they retire from their sport. Rose was no different, but he opted not to report the $354,968 he earned over a four-year period. The result was five months in prison and a $50,000 fine in addition to having to pay back the taxes he tried to avoid.Helpful hint: Don’t attempt to hide income. With less and less businesses using cash payments, the IRS now can use matching programs to quickly find underreporting problems.
While seeing well-known celebrities in the press for tax trouble makes for interesting reading, there are useful tax lessons for all of us. It provides an opportunity to see how IRS employees think and what they are reviewing.
All taxpayers should check their withholding – also known as a Paycheck Checkup – as soon as possible, even if you did one last year. By checking your withholding, you will ensure that enough is being taken out of your paycheck or other income to cover the tax owed.
Of course, Hawkinson, Muchnick & Associates is always here do a Paycheck Checkup for you. However, if you wish to do this yourself, here are some things you should know about withholding and why checking your Paycheck Checkup is important:
You should check your withholding as early in the year as possible. If you have not yet done a Paycheck Checkup, there is still time to get your withholding on track. And, you should do a checkup ASAP.
You should also check your withholding when life changes occur. These changes include things like:
Marriage or divorce
Birth or adoption of a child
Purchase of a home
Retirement
Chapter 11 bankruptcy
New job or loss of job
Some taxable income is not subject to withholding. People with this income who also have income from a job may want to adjust the amount of tax your employer withholds you’re your paycheck. This includes income from things like:
Some life changes might affect a taxpayer’s itemized deductions or tax credits. The taxpayer should check their withholding if they experience changes to their:
Effective tax planning helps you make smart decisions now to get the future outcome you desire – but you need to make sure you don’t miss anything. Forget to account for one of these situations and your tax plans will go off the rails in a hurry:
Getting married or divorced. One plus one does not always equal two in the tax world. Marriage means a new tax status, new deduction amounts and income limits, and a potential marriage penalty. The same is true for divorce, but with added complexity. Untangling assets, alimony, child support and dependents are all considerations worthy of discussion.
Growing your family. While bringing home a new child adds expenses to your budget, it also comes with some tax breaks. With a properly executed plan, you can take home the savings now to help offset some of those new costs. If you are adopting, you get an additional tax credit to help with the adoption expenses.
Changing jobs or getting a raise. Earning more money is great, but if you’re not careful, you might be surprised by the tax hit. Each additional dollar you earn gets taxed at your highest tax rate, and might even bump you to the next tax bracket. If you are switching jobs, the change also includes things like new benefit packages to consider.
Buying or selling a house. Whether you’re a first-time homebuyer, you’re moving to your next house, or you’re selling a house, there will be tax implications resulting from the move. Knowing how your taxes will be affected ahead of time will help you make solid financial decisions and avoid surprises. If you’re looking to buy or sell investment property, even more tax issues come into play.
Saving or paying for college. There are so many different college tax breaks, it can be tricky to determine which ones might make the most sense for your situation. These include the American Opportunity Tax Credit, the Lifetime Learning Credit, the Coverdell Education Savings Account, 529 plans and student loan interest deductibility.
Planning for retirement. Everyone needs to plan for retirement, but each situation is different. Some of the factors to keep in mind include employment status, current income, available cash, future earnings and tax rates, retirement age and Social Security. Putting all of these variables into one analysis will paint a clearer picture of your retirement strategy and provide a way forward.
Don’t make the mistake of omitting key details from your tax plan. Call now to schedule a tax-planning meeting.
Think taxes are simple and filled with common sense? Think again! Enjoy this fun quiz to see how well you know the crazy world of state taxes.
If you have a hankering for an apple or banana at work, you’ll pay an extra tax to buy fruit from a vending machine in which state?
Georgia
B. South Dakota
C. California
D. Oregon
California. Cold food is tax-exempt if purchased at a store, but subject to tax on 33% of the price if you purchase fruit from a vending machine. If you sell fruit in this state…good luck keeping track of the tax.
Looking to finally get that “mom” tattoo on your arm? Which of these states charges a 6% tax on that tattoo?
Minnesota
B. Arkansas
C. Delaware
D. Texas
Arkansas. Body piercings are also taxed at 6%. So if you are waffling between getting that tattoo or a nose ring, you can eliminate taxes as a deciding factor!
Have you ever looked at a tree in your yard and thought, “wow, that tree sure is exceptional”? If you have one of these “exceptional” trees on your property you might be entitled to a $3,000 tax deduction in which state?
Hawaii
B. Missouri
C. Maine
D. Alaska
Hawaii. Worried about how new developments were destroying the environment in the 70’s, the Hawaii State Legislature added the tax deduction for expenditures paid to maintain an exceptional tree.
Next time you are at a bakery in this state and the baker lifts the knife to cut your bagel, stop them. It could be a taxable event! Can you name the state?
Utah
B. Wisconsin
C. Pennsylvania
D. New York
New York. Slicing a bagel meets the state’s definition of prepared food and is subject to an 8 percent sales tax. That goes for applying cream cheese as well.
Looking for a long-term retirement tax-savings tip? Which state exempts you from state taxes once you turn 100?
Michigan
B. New Mexico
C. Rhode Island
D. Virginia
New Mexico. If you are 100 or older and are not claimed as dependent, you are exempt from filing and paying New Mexico personal income tax.
As you enjoy the nice spring weather, spread some of this fun tax knowledge with family and friends.
Too many people downplay the threat of identity theft because it hasn’t been witnessed or experienced firsthand. This false sense of security can leave you exposed, especially during tax season. Here are some tips to keep your identity safe from scammers:
Be naturally suspicious. Understand that there are people out there trying to get your information, and others willing to pay for it. With that knowledge, be suspicious of anyone asking for personal information – especially your Social Security number (SSN). Even when a known vendor asks for your SSN, ask what they will be using it for and refuse most requests unless you deem it necessary.
File your tax return as soon as possible. A popular tax scam is to file a fake tax return and deposit the refund into the thief’s account, all before you get the chance to file your own return. You close the door on scammers once your tax return is filed with the IRS.
Shred (don’t just crumple) your documents. Get in the habit of shredding all paperwork before it’s thrown out to keep personal information from falling into the wrong hands. If you don’t own a shredder, contact your bank or other local community services as they often offer free shredding services on specific days.
Keep your Social Security card safe. Only carry your Social Security card with you when it’s needed for a specific purpose. Your wallet or purse is not a good permanent spot for your card. Any criminal would have a treasure trove of personal data if it were to get lost or stolen along with your driver’s license and credit cards.
Periodically check your credit reports. The three major collection agencies (Experian, Equifax and TransUnion) are legally required to provide you with a free credit report each year. Take advantage of this service and review the reports. Correct any errors and use this report to monitor your accounts for any potential identity theft.
Be smart when handling your personal information. Don’t get caught off guard by identity theft, especially by being careless. If you think you are a victim of a tax scam, alert the IRS right away and go to identitytheft.gov for more information.
