What Triggers An IRS Audit? (aka Desk Audit Tax)

Desk Audit Tax
Avoid Audit Red Flags

Nothing brings on the cold sweats like an official letter from the Government; particularly the IRS. Like being pulled over by the police while driving, thoughts of everything you have ever done (or may have done) wrong begin to flood your mind. There are two different classes of IRS Audits: Correspondence Audits & Desk Audits.

A Correspondence Audit is by far the most common type of audit the IRS issues to Taxpayers. These are generally the lowest level of an audit and usually involve small amounts of money. Verification of income & expenses are done almost completely by Mail or Fax and you may never even speak to your auditor. Conversely, A Desk Audit–or Office Audit–is when the IRS directs a taxpayer to an IRS office for an in-person interview. These generally involve larger amounts of money.

Regardless of what type of Audit a taxpayer receives, thoughts of asset seizures and/or jail time are common worries. However, being locked up or having your bank account seized are very rare. Usually, the punishment is simply the difference in tax calculated in the IRS’ favor, accompanied by a late payment penalty and interest. If a taxpayer can’t pay the penalties and taxes immediately, the IRS will usually accept a payment plan; as long as payments are made there is no need to worry that bank accounts will be raided or assets liquidated. Nevertheless, the stress and burden of the taxpayer to produce the documentation if very real. If fact, the Taxpayer Advocate wrote that Correspondence audits are not necessarily less work for the taxpayer. While there is no sure fire way to eliminate your chances to being audited (the IRS & States issue many random audits a year), there are many Red Flags a taxpayer can avoid to reduce their chances of being audited:

1. Not Reporting All Of Your Income: The IRS cross checks your income sources with 1099s and W-2s. If your income has dropped, that may be a red flag. Do not under report your income, no matter how tempting. If you have some self-employed income, report it and then use every deduction or write off you can find.

2. Claiming Large Charitable Deductions: The IRS calculated what the average donation is for a person in your income bracket. So if indeed you made a large donation last year be sure to have proper documentation. A cancelled check will do if the amount is under $250. Over that amount, you will need a letter from the charity.

3Earning A Bunch Of Money: Over $100,000. You are 5 times more likely to be audited if you make the big bucks so be sure to document all of your deductions and income.

4. Taking Higher Than The Average Deductions: If the deductions on your return are disproportionately large compared to your income, the IRS audit formulas will go “tilt”. So if you have large medical deductions be sure you can prove them if need be.

5. Home Office Deduction: The IRS is always interested in this deduction, because history has shown that many people who claim a home office should not. If you work out of your bedroom or dining room, the deduction may be invalid.

6. Business Meals, Travel And Entertainment: Schedule C is filled with tax deductions for the self-employed individual. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions. They then make the assumption that all such individuals may cheat so Schedule C will get a review.

7. Claiming 100% Use Of Your Car For Business: If you are self-employed and use your car for business be honest with how much you actually use the car for business. Keep very good records of the miles you drive. I know it’s a nuisance, but necessary.

8. Cash Businesses: If you have a cash-intensive business like an antique shop, junk shop, car wash, a bar, a hair salon, or a restaurant you are probably on the IRS’ short list! Whenever a lot of cash is involved, the assumption is someone is slipping some under the table!

9. Large Cash Transactions: The IRS requires reports to be filed for cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses.

10. Math Errors: If you do your tax return in long hand, check your math and be sure to sign the return and put in the correct social security numbers. A sloppy return can trigger an audit.

Doing a tax return yourself is almost never a good idea.  Having a professional with many years of experience preparing tax returns can help reduce your chances of being audited even more by avoiding common errors do-it-yourselfers make.  If you’d like more information about how R&G Brenner can help you, please contact us here.

Source: CBS

The True Cost of Do-It-Yourself Taxes

The Average DIY Taxpayer Lost b/w $347-$841

Fellow tax professional Dave Ramsey recently preformed a survey of 2000 taxpayers; about half of who prepared their own returns, and the other half who had them prepared professionally. This is what he found:

When you use software to file your income taxes, there’s a moment, an instant just before the point of no return, when you silently wonder—what if?

What if I didn’t enter the numbers correctly?
What if I miscalculated?
What if I missed a deduction or credit?
What if I claimed a deduction or credit I’m not eligible for?

All that uncertainty is one of the downsides of self-filing. Other disadvantages can hit you where it hurts most—your wallet.

Reduced Refund

Since most folks aren’t tax experts, it’s easy for them to miss deductions or credits when they self-file. They are also more likely to take the standard deduction instead of itemizing their expenses. Either of these mistakes could lower their refund.

Take a look at these numbers from our recent survey of 2,000 of Dave’s Facebook fans.

  • Self-filers got an average refund of just less than $1,500.
  • But folks who had their returns professionally prepared had an average refund of nearly $1,800!
  • Procrastinating self-filers, those who filed their returns during April, got an average refund of more than $1,800, while those who used a pro got an average $2,600 refund!

Those folks potentially lost hundreds of dollars by trying to save a buck and doing their taxes themselves. It doesn’t seem like such a smart choice now, does it?

Magnified Mistakes

The cost of DIY tax prep isn’t limited to the size of your refund. Your mistakes can also cost you in the form of penalties and interest.

The IRS checks every return for a signature (manual or electronic) and math errors and cross-checks all sources of income that are reported via W2s, 1099s, etc. So if you fail to report any income or enter the wrong number in the wrong column, the IRS will call you on it.

And if it turns out you owe taxes, by the time the IRS notifies you, penalties and interest will have already inflated that amount. You’ll be charged a penalty for paying late and you’ll be charged interest from the date the tax was due until the date of payment, and it compounds daily.

By working with a tax professional, you’ll not only have confidence that your taxes will be done right the first time, you’ll also have peace of mind that your tax professional will be there to help you if the IRS has questions about your return. File with [consumer] tax software, and you’re on your own if the IRS comes knocking…

The evidence is clear; trying to save pennies with DIY tax software can cost you thousands of dollars in unclaimed refunds, penalties and/or interest.  And one of the most important losses is your time.  Remember, even if you are using a “free” DIY tax service, you still have to take the time to for research, record keeping, learning the program and double checking all the figures.   It obvious that receiving a larger well deserved refund is more valuable than smaller refund.   However, the old adage that “time is more valuable than money” couldn’t be more true especially when the IRS reports that it can cost a taxpayer up to 32 hours simply to prepare an annual tax return!

So, save yourself time, money & the stress of preparing your income tax return yourself and contact an R&G Brenner tax professional today.  We offer a free consultation for your current year tax returns as well as your 3 previous years returns.  Plus, you can qualify for many promotions that can save you money & even make you money.

Source: daveramsey.com

Tax Preparers Vs. Tax Software

I recently read an article that breaks down the differences in the two most popular tax preparations software; Intuit’s TURBOTAX and H&R Block’s AT HOME (previously knows as TAX CUT).  I am going to post some of the interesting findings and add R&G Brenner’s comments underneath:

TAXES can make people do silly things, like investing in chinchilla and ostrich ranches or, over the last several years, buying a second home — which was a bad move just about anywhere in the United States.

For some folks, buying tax-preparation software may be nearly as wrong-headed…And if your taxes are complicated, you may be better off enlisting a professional’s help.

Obviously, R&G Brenner’s business depends on paid tax preparers, therefore it will not shock anyone that I agree with the above statement.  For  those with no experience with tax law it is almost NEVER a good idea to attempt to self-prepare your taxes.  This is where those who think they are saving $100-$200 dollars could be costing themselves thousands of dollars.  Adding dependents, itemized deductions, multiple W2’s/1099’s, unemployment income or rental income drastically increases the complexity of tax returns.  And regardless of how good the automated step-by-step instructions are in do-it-yourself software is, they routinely miss deductions and credits which can dramitcally affect this size of one’s refund or the amount of taxes owed.

About three of every four filers receive a refund, and filing online can accelerate the process. You must use software, either personally or through a preparer, to file electronically, and e-filers can see their refunds in as few as 10 days, Mr. Williams said. Mail filers typically wait at least six weeks.

At R&G Brenner we do NOT charge any additional fees to file electronically.  A lot of firms like H&R Block continue to charge extra fees to e-file.  Read the fine print.  Depending on which version of do-it-yourself software you use, there can be additional charges to e-file and that needs to be factored into the bottom line.  And heaven forbid you need to file multiple states or you buy a software package that doesn’t include the forms you require.  This all equates to more fees than the enticing low pricing  they advertise or the lure of a “free” tax return.  Not to mention the actual time-factor involved!  But I will leave that for a little later…

Before you buy a tax-preparation program, understand that it won’t be a panacea. You still have to keep good records — they matter mightily if you’re audited — and, in complicated situations, you may need to research tax laws yourself. The software can’t tell you whether tuition for your Spanish class is deductible, only that job-related educational expenses might be. What’s more, it won’t ease the headache you may get by trying to find answers on the I.R.S. Web site. The agency provides reams of guidance, but the rules can be murky for people who muck about with them only occasionally — even pros…

The biggest shortcoming in each program isn’t what’s in it but what’s not: You’ll have to laboriously enter your personal data. If you’ve used tax software previously, you can transfer some of your information. But you’ll need to update entries to reflect last year’s earnings and expenses, and that takes time.

Well said.  Just because you buy tax software doesn’t mean that your taxes are going to magically prepare them self.  Someone (you) is going to have to dive into all your receipts and expenses to organize them and determine what is deductible and what is not.  The rules change if your are an employee, independent contractor, self-employeed or a combination of the three.  Furthermore, all tax software has to be approved for release BEFORE the beginning of the current tax season.  The biggest problem we see with this is that many tax laws are not completely settled on before January 1st.  Thus, no tax software is ever fully complete out of the box.  For example, the IRS ruled that charitable donations for earthquake related relief for Haiti was ruled deductible for tax year 2009 if made before February 28th of this year.  There is no way do-it-yourself software will know this unless you continually apply updates as they are released.  Failing to install updates can have serious consequences in the miscalculation of your tax return.  It could take years for the IRS and/or state to catch those mistakes.  And for those that owe taxes and do not pay all that is due, it could result in high penalties and accrued interest…sometimes more than your tax liability itself.

As your taxes become more complicated, the programs’ guidance can become less helpful…My wife and I, for example, moved from Philadelphia to Massachusetts in 2008 and, as a result, paid state and local taxes in several places last year. Philadelphia alone imposes a variety of taxes on the self-employed, and I managed to get tangled up trying to record all of them. In both programs, I had to jump back and forth repeatedly between the interview and the underlying forms to ensure I got them right. In several instances, I had to override the interviews and record information directly to the returns.

This is playing with fire.  Yes, sometimes the only way to deal with a unique tax situation is to manually override the warnings that are specifically designed to prevent errors.  If you do not know the tax laws of these special situations, you are asking for trouble.  The consumer do-it-yourself tax programs are bogged down with thousands of “error” notifications which can make even a simple override harrowing and nerve racking.  At R&G Brenner we do not use these overly simplistic tax programs.  We use an industrial tax program specifically designed and integrated to handle every state in the union that imposes an income tax.  There is rarely a need to override a program verification error…but when there is, you can rest assured our professionals know when to do it.

[No do-it-youself tax program] is certain to deliver you from tax-time stress. It’s the hard questions, like puzzling through the alternative minimum tax, that eat up the most time and cause the most worry. When you grapple with those, you may still be gulping antacids and aspirin come April 15.

The biggest factor in preparing your own tax return aside from the stress of organizing your records, determining witch tax laws apply to you & overriding the program is the TIME you MUST devote in learning all this stuff; and in many cases your time is way more valuable than small fee  you could have spent having a tax professional prepare your most important annual financial document.  Unfortunately, the recent economic crisis has put a lot of people out of work and thus they have a lot more time to attempt to prepare their own taxes.  However, just because you can, doesn’t mean you should.  There are a lot of people out there that love to cook for themselves.  But even that takes practice to become adept at it.  I find it mind-boggling how many people are willing to take the risk preparing their own taxes without any prior experience.  If you miscalculate your taxes in the IRS’ favor, they are not going to contact you saying “you qualified for this credit, so here’s an extra $1000”.

If you are one of the many that has attempted to prepare your own taxes, don’t worry.  At R&G Brenner we offer a FREE consultation for your current years taxes as well as a FREE review of your prior three year’s returns.  We will only quote you a fee if we can do better.  Furthermore, we have a tax software trade-in whereby we will reduce our quoted fee by the retail amount you paid for your software.  We also offer many more attractive promotions that will save you time and money (including a FREE tax return when your refer 3 new clients).  So when it comes to your tax return leave it to the Professionals.  No need to take unnecessary risks.  Go Green – Go R&G Brenner.

Source: NY Times