Taxes Can Be Scary: Part 7

Tax Fear # 7

Afraid I'll Miss Out on a Tax Break

I understand that when it comes to taxes, there are a lot of us out there who feel lost. We fear that if we try to file our tax return, not only will we overlook an error, but we fear that we will overlook tax breaks that we should be taking advantage of. Again, a reasonable fear but not a good reason to avoid filing your tax return.

You need to accept the fact that filing your tax return is going to take some homework. Before you start your return, be sure to check out the limitless publications available so you'll know exactly where this year's taxes might possibly trip you up. Again, you can also turn to tax preparation software or a tax pro for help in claiming all your possible tax breaks. Don't let fear take hold of you. The worst thing you can do...is nothing.

Cheers!
-Taxus

Further Reading:
Tax Deductions

Taxes Can Be Scary: Part 6

Tax Fear # 6

Afraid to file because I cannot pay what I owe.

I understand. I really do. You are afraid of the consequences for not having the money to pay when you file your return. I get that. But you have to understand that the consequences for not filing can be much scarier than what could happen if you file and can’t pay. Trust me, the IRS penalty for not filing is actually worse.

It is not a crime to file your tax return and not pay what you owe. By saying that, I mean that the IRS will not have you arrested because you didn’t have the money at the time you filed your tax return. However, you will face much harsher financial consequences by not filing at all and not paying what you owe.

If you owe tax and don't file on time, the late-filing penalty is usually 4.5 percent of the tax owed for each month, or part of a month, that your return is late. However, if you file on time but just can't pay your tax bill then, you'll generally face a late-payment penalty of only one-half of 1 percent of the tax owed for each month, or part of a month, that the tax remains unpaid.
The total nonfiling and nonpayment penalties could reach a cumulative 25 percent maximum penalty. But if you file your forms on time and then make arrangements to pay, you can avoid taking that hardest tax penalty hit.

Trust me, it’s in your best interest to file your tax return and if you find yourself in a situation where you cannot afford to pay the bill, Uncle Sam will work with you. The IRS can set up an installment agreement with you so that you can pay off the debt over time. If you file and cannot pay, there are options. If you do not file at all, you will end up screwing yourself in the end.

Cheers!
Taxus

Further Reading:
IRS Penalty Abatement- Can You Really Get Rid of Penalties?

Taxes Can Be Scary: Part 5

Tax Fear # 5

Afraid I will get audited.

Well hell…no one likes the idea of being audited but you don’t have to let that manifest into a fear that prevents you from filing your tax return. If you have taken the time to complete your tax return accurately and you have claimed legitimate tax breaks, then you will have nothing to worry about. Now on the other hand, if you're doing stupid things on your tax return, then expect to get audited. There are obvious red flags, such as excessive medical or charitable deductions that might catch the eye of an IRS examiner. However, if you can show why you filed as you did, and the reason was legitimate, you will be fine. Make sure you keep good records and if you have questions on how to file, ask someone! It’s that easy.

Cheers!
Taxus

Further Reading:
Understanding Audits

Taxes Can Be Scary: Part 4

Tax Fear # 4

Afraid my tax advisor is incompetent or a crook.


This fear has been substantiated for some as soon as they turned on the news and saw that a number of Jackson Hewitt franchises had filed bogus returns for clients and as a result, 125 branch offices were shut down. The same fear is also validated every time they hear a friend say that they were audited because the person that did their taxes screwed something up. It’s a reality for some but it does not need to hold you back from filing your returns.

Everybody makes mistakes, even tax professionals. I am afraid it’s human nature. But no one said that you had to pay for those mistakes. Do your homework and hire a reputable firm. You can look them up online at the Better Business Bureau’s website or go to RipOffReport.com and read the testimonials that have been posted. And once you are a client, don’t take every suggestion at face value. Make sure you ask questions and understand why it is that they are putting what they are down on your tax return. Remember, if it sounds shady…it probably is.

Cheers!
Taxus

Taxes Can Be Scary: Part 3

Tax Fear # 3:

Afraid to e-file because my personal info could be lost or stolen


Roughly 50% of taxpayers send in their returns electronically. Part of the group that comprises the other 50% are afraid that filing electronically puts you and your personal information at risk, and this is why they are still filing the old-fashioned way.

I cannot sit here and tell you that identity theft is not a major issue nowadays. Hackers have become really good at breaking into online financial data systems and will do so from time to time. One of the biggest issues though is not the submission of sensitive material through the computer but the storing of such data on the computer in the first place. Currently, one of the biggest problems the IRS has concerns the theft or loss of laptop computers that contain such information.

The transfer of sensitive tax data online will involve the taxpayer and the IRS server. Make sure everything is secure on your end and that your computer has an up-to-date firewall and virus protection program. As for lost data, make sure you back up your files regularly. There’s no reason that a computer or data loss should cause filing problems. I am afraid that the IRS doesn’t really accept that as an excuse for not filing a return.

Cheers!
- Taxus

P.S. This is a misplaced worry. Although the fear of identity theft is very valid, the fear that an e-file will cause it is wrong. See this article on Taxes and Identity Theft to learn what to really be wary of. Or, try these I.D. theft articles.

Taxes Can Be Scary: Part 2

Tax Fear # 2:

Afraid That I Will Make an Error That Will Cost Me Dearly

"Ok. Say I file my taxes. But what happens if I make a mistake and owe money? No no, I can’t let that happen. I am just not going to file at all."

Seems ridiculous but some people really do think this way. They believe that at some point while preparing their own tax return, they are going to make some kind of error. This might include choosing the incorrect filing status, forgetting to include additional income, claiming dependents they shouldn’t, or even filing the wrong tax form altogether.

Trust me. It happens to the best of us. We are going to make mistakes and that is how we learn. Do not forget that we learn from not only other’s mistakes, but also our own. If you are afraid of making a goof, slow down and take your time. If you do not know something, ask someone for help. READ THE INSTRUCTIONS. Take the necessary precautions in order not to make a mistake. Simple as that. You cannot let the fear of messing up prevent you from filing your tax return altogether. If you did, pinpoint that as one of the biggest mistakes you can make.

Also, if you do make a mistake, you can file an amended tax return in order to fix it. This is also why it's important to file early... in case you do make a mistake.

Cheers!
- Taxus

Taxes Can Be Scary: Part 1

Tax Fear #1:

Afraid I cannot prepare my own taxes

Ok, I admit that this fear is not only common but occasionally justified by the way our tax system continues to make things more complicated. There is always new tax code being introduced and what was suppose to be a simple tax return can now seem like a calculus exam.

The media has not tried to alleviate this fear either. You cannot watch television without coming across a commercial for a tax preparation service promising to handle filing your taxes, because your taxes can be complicated and should really only be prepared by professionals. If you mess up, you will have the IRS to deal with.

So what do you do? Well, some of us panic. But that obviously doesn’t help things. Take a minute to breathe and realize you have options.

First, don’t assume that when you sit down to fill out your tax return that you have to know all the answers ahead of time. Chances are you aren’t going to know something and will need to ask someone for help. So do just that. It’s ok to do so. I promise.

If your tax situation is not too complicated, you can purchase computer software to aid you in preparing your return.

Another option is to hire a CPA who can assist you or to take your tax returns to a tax preparation firm. It’s your call and what you do should best fit your situation. In the end, keep in mind that not filing your returns because you are afraid you won’t be able to prepare them yourself is not a good reason for not filing taxes altogether. You always have options.

Cheers!
-Taxus

Further Reading:
Picking A Tax Professional
Need Old Return Filed? Hire an Enrolled Agent!
CPA? Software? E-File? WHAT'S A GIRL GOTTA DO TO GET FILED?!

Taxable Income & Gifts: Am I Screwed? PART TWO

Taxable Income & Gifts: Am I Screwed? PART ONE

So, from my previous post we know that gifts and inheritances are NOT usually taxable.

... But the fine print here is that you still must report the gift and it may be taxable if it exceeds certain amounts.

Why might it be taxed?

Taxable Gifts

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. It is taxable if it exceeds $12,000, $24,000 if married filing jointly.

Gifts That Are Never Taxed

• tuition or medical expenses you pay directly to an educational or medical institution for someone’s benefit
• gifts to your spouse
• gifts to a political organization
• charitable donations

Estate Taxes

To put it simply, taxable on the amount that's over 2 million for a year of death in 2006 or 2007. Report inheritance on a 1041 K-1.

Appreciated Securities

If you pass on stocks or mutual funds, the tax burden is then transferred to the new owner. Simple as that!

See here for direct info from the IRS on Estate and Gift Tax. For more general info on gift tax from the IRS see here.

And, as always (and especially in this case), consult your tax professional (please!).

Taxable Income & Gifts: Am I Screwed? PART ONE

So, you've received a gift from a relative of a sizable sum. And it's tax time. What do these things mean? Headache and worry. Do I report? Is it taxable?

Let's get into what is and is not taxable first.

The basic distinction that makes something taxable or not taxable is whether or not it can be included as income...

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer
• Tax Exempt Interest from municipal bonds and tax exempt bond mutual funds. Although this interest is usually not taxed it must be reported on line 8b of Form 1040 or 1040A.

Examples of items that may or may not be included in your income are:

• Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

All other items, unless specifically excluded by law, must be included in your income. This income may be in a form other than cash. For example:

• Bartering. Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.
• Gambling winnings- this includes lottery winnings.
• Prizes – if you win a prize in a contest.

So, basically, if it CAN be income, it SHOULD be taxed. See this IRS publication for a more specific explanation.

Now, this seems pretty clear cut. Gifts and inheritance are NOT taxable. But the IRS is a sneaky thing and there are nuances to this rule. See PART TWO for more.

Identity Theft And Your Taxes

We blogged earlier about the seven most common tax fears that prevent people from filing. One was a fear of having your personal info stolen. While, being someone who knows the tax system, this seems silly, it is a real concern in today's world. I know I've had personal experience with identity theft and it's no fun. I shredded everything with my name on it for months... and I still do to a degree today.

But we talk about taxes here at Tax Facts. So, how does Identity Theft relate to taxes? Jim over at IRSMind is currently doing a 4 part series on Identity Theft and taxes. I'd like to apply the "Tax Facts" mantra and put what he wrote into explicitly clear English to understand I.D. theft's tax ramifications.

Identity theft is the number one fraud concern in the United States today and causes a myriad of immediate problems such as emptied bank accounts, bounced checks, illegitimate credit card charges, credit report problems, and more. However, one item that may not show up for years, but will last for years, is the effect I.D. theft has on your taxes.

How the Problem Begins

Each year your employer(s) and financial institutions send all of your W-2 and 1099 forms, along with other tax documents, to both you and the IRS. The IRS matches all these forms to you by your social security number. Social security numbers are key, for they allow the matching of forms to people. Herein lies the problem. If someone is working under your social security number, their tax documents will be matched to you, along with your legitimate tax documents. Therefore, not only will your actual income will be reported as yours, but the identity thief’s will too.

When you file your return at the end of the year, the IRS processes it. They will run it through their system to make sure that you reported all the W-2 and 1099 income they have on file. If you’re a victim of identity theft, you’ll have tax documents that are left off your return (the I.D. thief’s forms) and red flags will be waved. The IRS usually takes about 12-18 months to notice the omission, but when they do you’ll receive a CP 2000 letter as notification of the discrepancy.

What This Means to You

Money and time. Essentially it becomes your word against the IRS’ and you start playing private detective to clear up the mess. While you are cleaning up the mess, the IRS will most likely asses you, which is assigning taxes, interest, and fees owed on the underreported income, and then start the collection process. At this point you are faced with an uphill battle of removing the assessment while the IRS has the right to forcefully take your money by filing tax liens and levying your wages and bank accounts.

How You Can Fix It

In short, fixing identify theft requires a proactive approach and proof by documentation. When you are a victim of identity theft, filing a police report is a necessity. Most people do not file a police report because they focus on the immediate problems—clearing up their bank account or credit card issues. However, documenting the incident and retaining these documents is also a must incase of future problems. But what do you do once you are assessed erroneous taxes?

• Contact the IRS immediately- the contact information on your audit letter or CP 2000 will tell you who to contact
• Get a copy of what has been reported to the IRS under your social security number (i.e. your “IRP document”)
• Review the document for discrepancies and contact the employers/contractors/payers for a correction to their Forms- make sure they notify the IRS
• If you cannot get the payer to correct the form, show proof that this income could not be yours: bank statements, police report, proof of identity theft in other areas (credit cards, etc.), and affidavits from your employer stating where you worked- and the timesheets
• Consider changing your social security number if the SSA permits
• Contact the Federal Trade Commission and file a complaint, use this as evidence for your tax problem
• Report the tax fraud to the IRS immediately after you have discovered it

Ultimately, you may want to contact a tax professional that knows how to work within the IRS system to resolve your problem. Resolving tax disputes is a time-consuming process that can cause a lot of pain and suffering- especially if you do not anticipate what could happen to you.

Taxes Can Be Scary: Introduction

There are many articles posted on the web that deal with common tax mistakes/blunders. These articles assume that we are filing taxes and usually address the errors that we tend to make along the way…Great articles that usually provide the public with a lot of good information. But where are the articles that speak to those who never even make it that far in the process? Well, I am going to write one that will be broken up into a 7-part series. The main reason for this being that I don’t overwhelm you with too much information (and the fact that most people won’t read a blog post that is the length of a short story). Therefore, it is best I break it up into parts. The main goal of this series will be to address the fears that many taxpayers have and to explain what to do if you suffer from one of those common tax terrors. Enjoy!

- Taxus

The IRS Repossessed My Car...

I was busy putting my trash cans by the road since tomorrow was garbage day. Then I hear the slurred voice of my neighbor and before I know it, I am trapped talking to him. It was already 2pm so he was well lit by this point. "Hey guess what? I am finally getting my car back. I settled up with the IRS and they are going to give it back to me. I would of had it sooner, but it takes forever to get a hearing with them."

Now, to know my neighbor would mean that you know he is an alcoholic and a habitual liar. First off, the Internal Revenue Service wouldn't have repossessed his car...the bank or lender would have. The IRS could have placed a federal tax lien against my neighbor and that would have prevented him from buying or selling a car, but they certainly did not repossess it. It's just not their style. Second, to get that car back once repossessed, my neighbor would have had to fork over some serious dough and that was not possible for a man who wasn't working. No, once again my inebriated friend is lying to my face. I know this because as I said before, the IRS isn't going to repossess the car. I also know this because the owner of the house my neighbor was renting told me so. You see, the car is the house owner's, and he gave it to his renter to get around town in. He took the car because he noticed my neighbor was behind on his rent, wasn't keeping up the house, and remained in an intoxicated state. So the real reason my neighbor was getting back his "repossessed" car was because apparently the owner had a change of heart. Again, something uncharacteristic of the IRS.

Cheers!
- Taxus

As always, you can find an array of articles by perusing this site or by checking out my coworkers' individual sites:

IRS MIND
Tax Negotiation
Tax Thoughts
Little Miss Tax Lass
Tax Settlement

And if you need the assistance of a tax resolution firm, seek out the best: Effectur, Inc.