IRS tax audits are expected to rise possibly due to the fact that the government is planning to spend some of these funds in order to boost the present economy. This is the time that you need to be very cautious with your tax return since the IRS may collect more money through penalties coming from the taxpayers.
High earners should be more cautious because their financial statements are more complicated compared to those people with lower to medium income. The IRS looks more closely at their tax returns especially if there are complications that may lead to various mistakes.
Whether they had committed these errors intentionally or not, the IRS will always calculate them thoroughly especially if the individuals involved are indeed making a lot of money each year. So the higher your income level, the more careful you should become in order to avoid paying a high price for the small mistakes that you could commit when you're filing your income tax returns.
- Moderately Challenging
things you'll need:
- Financial Forms and Statements
- Paper and sign pen
- Computer and internet connection
- Tax preparation software
Report all of your income to avoid an IRS tax audit. Make sure to remember all the capital gains, interest, tips, and dividends that you had received. Remember to include the amount of work services that you had bartered and cash payments received coming from sales or any kind of job that you had done.
Review how you calculated what had entered on the IRS form to avoid an audit. Those mathematical mistakes are also the reasons why individuals will undergo an IRS audit.
Honestly report all your income on appropriate and officially accepted forms. Fill out the proper lines on your tax return. For example, the 1099-MISC for a non employee compensation should be seen on Schedule C line 7, while Form 1040 income should be shown on a W-2.
You also need to properly disclose income coming from you hobbies on Form 1040 and this should be seen on line 21. Avoid any discrepancy by double checking your income first prior filing out your tax return to avoid any chance for an audit coming from the IRS.
Take reasonable deductions in relation to your income. For example, if you earn $190,000 and claim $140,000 in deductions, just expect an upcoming meeting from the IRS. Individuals who receive cash income including small business owners who claim losses should provide adequate documentation.
Check all of your financial statements and transactions so that these documents will work together coherently with what you had reported to the IRS. You need to round off your tax deductions to the nearest dollar. Avoid rounding it to the nearest ten or hundred dollars.
File your income tax return honestly and correctly for the first time. Take note that the IRS will thoroughly review amended returns. Itemized deductions well so that they could surpass the IRS tabulation charts with regards to your income. Attach a photocopy document, copy of a canceled check or a letter of explanation if necessary in order to prove and justify your claim.
Retain financial detailed records and refer to the updated IRS guidelines upon filing so that you can properly substantiate the deductions you had taken to avoid any chances for a tax audit. Explain them well if you have a high deduction and avoid deducting the same expense more than once.
If it will already show on the schedule A, don't list it on Schedule C or E anymore. Take note that extraordinary expenses without providing proper financial statements will only raise doubt.
Be mindful of your forgiven debt if you have one. Some creditors are forgiving debt especially with the bad economy including the circumstances of your life situation. Many credit card companies will offer to "settle" your account even up to 40 percent of your original balance if you get behind.
Take note that forgiven debt is taken into account like an income by the IRS. For example, if you have a credit card and the company had decided to reduce the amount you owe to them from $8,000.00 to $5,000.00, you're also expected to pay income on that $3,000.00 amount.
At the end of the year, the credit card company will report this financial matter to the IRS as a "forgiven debt" and send you a 1099-C to file with your individual tax return. Most credit card companies would greatly prefer that you pay your bills that's why many of them offer different payment programs in order to help you manage your debt.
Settle your debt when you have money available at the bank. Contact your creditors to find the best settlement. Be courteous and honest about your situation with any creditor. Most companies will accept settlements if you're three or more months behind on your bills. Avoid using the service of a debt settlement company if you can do it on your own.
Be cautious with the cost basis if you had sold some stocks. Some people had received shares of stocks one or two decades ago and if they had sold them, they should also had traced the original purchase price so that they can report them properly to the IRS.
Take note that even if the financial transaction was already old, you still need to report the exact value on them for your tax return. Don't forget to add the adjustments such as stock splits as well as commissions received. Disclosing to the IRS the right amount of profit made when you sold these stocks can make you sleep well at night.
Respond promptly if ever you'll receive a notice coming from the IRS requesting for additional information. Stay calm and act accordingly once you get it since the IRS treats notices sent to taxpayers as their normal routine.
If you were confident that you had done your tax returns honestly and properly then you can just respond to the IRS through writing by attaching the right financial statements and documentations.
Acquire the corrected copy of your 1099 or W-2 from the official who had issued it prior to filing the income tax return if the original is inadequate or inaccurate. You also need to report any income that comes or associated through your Social Security number.
Prove the legitimacy of your status being a self-employed person. People have shifted their interest to self employment via home-based businesses particularly online. Many are encouraged to turn their favorite hobbies into businesses especially with the modern tools coming from online technology in order to bring in extra money.
Don't forget to register your home business with the proper authorities if you have one. Always keep accurate records of income and expenses so that you can prove the legitimacy of your home-based business.
It would be easier for you to have a separate bank account for your home business so that it won't mix up with your personal expenses. You could also hire a tax accountant for it if you really need one.
Seek the advice of a tax preparer if needed because penalties for carelessness could be exorbitant. Large sums of money contributions or donations to charities coming from your income could give doubts to the IRS.
Retain an official receipt if you have a deduction through any charity. Donations amounting more than what you can afford based on your income level may raise a red flag. Keep proper documentation and retain receipts for your cash and non-cash donations to prove those donations in case you'll be audited.
Prepare your income tax return in a professional way. Check for any erasures or cross-outs before you decide to submit it. If you'll do your own taxes, make sure that it's neat and all the needed information is decipherable and legible for easy reading.