Economics Finance

Though tax audit is a scary process, you can’t avoid it. Once you receive that ‘invitation’ from IRS, you have to make elaborate preparation to get out of it successfully. The following tips will help you -

1. Understanding the red flags – Most of the times tax audit is a result of ignoring red flags. You should give some time to research the reasons for which tax audit was initiated by IRS. The important red flags are – filing multiple exemptions, having offshore accounts, claiming excessive charitable contributions, taking undue home office deductions or plain mathematical mistakes. If you are able to identify a particular reason, you can better deal with the related questions.

2. Analyzing your business accounts – If you are self employed, you should scan the accounts of your business. You should particularly check the legitimacy of expenses and deductions claimed by you. Continue reading ‘How to Prepare For a Tax Audit’ »

It is a glorious event that takes place every year without fail. The month of April rolls around and the drama builds. Then it happens. You file tax returns? No. You file an extension! The folklore surrounding the act of filing an extension is extensive, but does it really impact your risk of being audited by the IRS? Let’s take a look.

As an individual taxpayer, you have the option of filing for an extension to file your tax form each year so long as you do it on or before April 15th. The magic document is Form 4868. It is shocking short and simple to fill out. Even better, the application is granted automatically by the IRS. You get a six month extension to October 15th to get your act together. Most people remember this deadline right around October 14th in the middle of the night, but that is another matter.

The filing of an extension is seen by some as an act that causes a reaction by the IRS. Depending on who you are talking to, this reaction can be good or it can be bad. The “good reaction” crowd believes that filing an extension is a good move because it lowers your risk of an audit. The thinking is the IRS hires extra employees to help it during the tax season around April and then lets them go. With fewer employees around, there is less chance you’ll get audited because there simply isn’t the manpower to do it.

The “bad reaction” crowd looks at the extension differently. They believe the filing of extensions, particularly when done year after year is indicates to the IRS that you are up to something. This, in turn, puts you on either a watch list or sends you straight to an audit. Either result is, of course, bad. Continue reading ‘Does Filing an Extension Change Your Risk of Being Audited?’ »

You may be coming across many ‘clues’ about people enjoying a flashy lifestyle by hiding their income from IRS. As an honest taxpayer, you can pass on this information to the IRS and get some reward in the bargain.

If you suspect that someone is evading taxes, you can become an IRS informant to get his fraud exposed. You can start the process by making a single phone call. If you contact the Informant Communication Hot-line, they will be able to register your information for further investigation. If you want your effort to be rewarded, that time itself you should inform them that you wish to file Form 211. You have to be very clear on this. If you forget to mention about the reward or Form 211, you may not be able to claim any reward later.

In this form, you have to enter your name, fill in all other details and then sign it. If you want to claim a reward, you must disclose your real name. Your details are kept strictly confidential. You should mail this form to the IRS center, addressing it to Informants Claim Examiner.

You should not file this form just for taking revenge. You must have some substantial information which IRS is not able to access so far. Just informing the IRS about something which is available on public records will not be of any use. The information should lead to the recovery of substantial revenue. Continue reading ‘Want to Become an Informant For the IRS? Know the Rules’ »

When you blow a whistle for people who cheat IRS, you can get a reward – up to 30 per cent of the tax and penalty collected. But the things are not that straightforward. You should also know the fine print of the offer.

The Tax Relief and Health Care Act of 2006 introduced this program. It says if you come across someone evading taxes to the tune of $2 million or more, you can report information on such tax cheat to IRS. There is one more condition – the income of such cheat should exceed $200,000. It is obvious that someone hiding two million dollars will have an annual income of $200,000!

So IRS is targeting high income growth to make its effort worthwhile. Consequently, people giving such information can be only the employees or former employees of a business or the ex-boyfriends or girlfriends or ex-spouse of the evader.

The law is providing the whistle-blower some privileges – The whistle-blower may not necessarily be an original source. Secondly, if he is not satisfied with the reward, he will have a right to go to a tax court within a period of 30 days from the date IRS decides on the reward.

The amount of reward is also made lucrative – the whistle-blower is entitled to a reward ranging from 15 per cent to 30 per cent of the tax and penalties collected and depending upon his contribution to get the collection. If he is not the ‘original’ source of information, he can still get up to 10 per cent of the amount collected as a contributor towards collection. Continue reading ‘You Will Need Patience to Get Those Lucrative Commissions As a Successful Tax Whistleblower!’ »

Jobs have been fleeting the last few years. Fortunately, unemployment benefits have provided a safety net for many people. Most people don’t realize that the taxability of these benefits is an issue.

The Great Recession has move through practically every financial industry and the end result has been huge increases in unemployment numbers. As I am writing this, the unemployment rate stands at just under 10 percent. That is staggering. It means roughly 1 in 10 people are without a job. Many others are working part time or reduced hours and thus are not counted as unemployed. All and all, it is a fairly dire situation and one can only hope business picks up and jobs start being created. Continue reading ‘Are Unemployment Benefits Taxable?’ »

The current recession being the worst since the great depression has affected Americans in many ways. Going forward we are forced to be more cautious on our spending and borrowing habits but be aware that tax policy will be more aggressive during these times. The United States government has implemented plans to boost tax revenues by going after tax evaders in the Swiss banks, eliminating the provision for allowing overseas business income to be tax exempt and by being more aggressive on those that aren’t current in their taxes amongst other things.

As a tax advisor, I have come up 5 ways to limit your tax liabilities in these tough times. Some of the suggestions, you might have already heard of but if one takes advantages of all these suggestions, you might be surprised that you could reduce your tax liabilities by almost 30% on a yearly basis.

Municipal Bonds (often called munis)- These are bonds that are sold to state municipalities such as schools, governmental agencies, local infrastructure such as airports, seaports etc These types of bonds are more attractive than corporate bonds because their interest payments are tax exempt. No federal income tax and no state or local taxes in most states. There are a few that are taxed which are called private activity bonds but there is no need to have those in your portfolio if you can purchase ones that are completely tax exempt. All bonds will disclose if they are taxed or exempt so it makes sense to go for the ones that are exempt. The default rates on municipal bonds are a lot less than corporate bonds. Although not completely risk free it is unlikely that states will default on a bond. You can find municipal bonds from your broker. As states are cash strapped from less tax revenues, there has been increased demand for these types of bonds as it allows states to raise money much easier. Continue reading ‘Five Strategies Of The Rich During Tough Economic Times’ »

People are relaxed while surfing social networks. They just go on entering unlimited personal information on their profiles. They forget the important fact – such profiles are usually open to the public. They can attract the attention of taxman who is free to use public records in his efforts to recover tax dues.

If IRS wants to know more about you (and your income), it will

usually start from your bank account, your employment record, your tax records and your records from the department of motor vehicles. Such public records provide vital information on you. However, all of these sources relate to olden times. IRS can get only limited information.

The hunger of IRS is much more. It targets the social networking sites these days. Almost everyone has an account on at least one such site. You may post inadvertently much more detailed information about you, your business, your income, your assets and your future plans on such sites. Such sites are helpful to find out your present location also. And powerful search engines like Google will follow the links from such social sites. By entering your name on Google search, the taxman can easily find the list of all such sites you are registered with. Then it is just a job of few minutes to find out all your unknown details. Continue reading ‘Your MySpace Page Might Show Your Real Face to the Taxman!’ »

Self employed people are allowed to deduct several expenses from their income before working out how much tax they need to pay. Sadly, most self-employed people are unaware of all the expenses they can deduct, and so most end up paying more tax than they should.

By taking the time to learn about which tax-deductible expenses apply to you, you’ll be able to claim back the maximum allowable within the law, but without increasing your chances of being audited. The following are common mistakes which many self-employed people make, and which can end up being costly in more ways than one: Continue reading ‘Tax Deductible Self Employment Expenses – 3 Common Mistakes’ »

United States citizens, who are living and earning outside the country, do not have to pay taxes on all or part of their income to the government. These citizens are entitled to an exclusion of up to $91,400 per annum, and are further entitled to exclude the amount that they spend for housing under the “Foreign Housing Deduction” along with the amount spent on meals.

To be eligible for these deductions, one must spend at least one whole calendar year abroad. This holds true even if the citizen returns to the United States for a short time. He can also go to other places for short visits, and still retain his eligibility to these deductions. A citizen can claim the normal tax exclusion of all other foreign earners if he is self-employed and working abroad. However, he is expected to pay self employment tax to the government. Continue reading ‘Foreign Earned Income and IRS’ »

Today, a lot of Americans are seen to be changing jobs due to dissatisfaction in their current job. Many of whom are fired from their jobs and are forced to find new jobs. Whatever the reason, finding a new job involves a lot of effort and time. The individual also needs to pay income taxes regardless of his financial status. To save oneself from paying a lot of taxes between jobs, one can get the help of a professional tax advisor.

You can save taxes on the cost of resume preparation, mailing and faxing the resume to the prospective employer. Even the cost of traveling for a job interview can be deducted from the taxes to be paid to the government. You can make long distance calls to prospective employers without any hesitation as you can deduct the amount from your taxes. In case, a job requires a shift in the residence, the moving expenses are also considered tax deductible.

In order to claim these amounts, you need to save and show all bills and receipts of these services. In case of lost documents, you can get duplicates from the credit card statements. This information is usually unknown to the common man and many people only figure it out when they consult a tax professional. Continue reading ‘Income Tax Implications During a Job Change’ »