5 mistakes that can lead the IRS to your door
By Kelly Walsh of Scaringi Law posted in Tax Law on Wednesday, December 9, 2015.
Death and taxes.
It is no coincidence that these two banes of human existence are linked in this cliché. No one wants to think about either, but when tax time rolls around, it is best to claim what is justly yours and pay only what is owed.
Instead of settling for a bare-bones retail tax preparer or the latest tax software program, you may need added help to understand the full sweep of IRS tax law -- especially if you recently experienced a major life change, such as a divorce, or you have been contacted by the IRS, owe back taxes or are contemplating a bankruptcy filing.
Someone who understands tax law can help you avoid these five common mistakes:
1. Blowing the April 15 deadline
Some people are born procrastinators; others have legitimate reasons for being tardy with their taxes, including record-keeping mix-ups and late or missing tax forms from employers, banks or stock brokers. The IRS liberally grants requests to extend the tax-filing deadline by six months, as long as you file the necessary paperwork.
A filing extension, however, will not give you extra time to make payments on any taxes owed. Your estimated tax liability will still be due April 15. If you are late paying, the IRS charges a penalty of up to 25 percent of the net taxes due.
2. Losing track of your generosity
A personal check is the easiest way to track and record your tax-deductible charitable contributions. By taking full credit for your generous heart, your adjusted gross income will drop in direct proportion, resulting in a lower overall tax liability.
Of course, some personal filers simply claim the IRS standard deduction on their returns. But if you don't track your deductions, you'll never know when itemizing is to your advantage. If you have medical expenses, mortgage or student loan interest, along with considerable charitable giving, you might be leaving money in the IRS's pocket.
3. Tossing out old returns too soon
There is no hard-and-fast rule for how far back in time the IRS can dig, but at the bare minimum, one must retain the prior year's return. Retaining copies of the past five to seven tax returns, along with all accompanying records, is wiser, especially if your returns are complicated with multiple itemized deductions.
There are other benefits to retaining these records. If you own stock, old returns can help calculate capital gains, which are based upon how long you have owned an investment. These records also come in handy after your death, and your estate is settled and taxed before your heirs see any money.
If you gamble, records of gambling losses can offset any winnings you may see within the same calendar year. These are good to retain, as are records documenting deductions for moving expenses, union dues, uniforms, mileage, home repairs, etc.
4. Bigger is not always better
Beware the tax preparer who promises the largest tax refund, bar none. Shopping around for the biggest refund can become a "save-now, pay-later" proposition.
They often don't warn you that you could be on the hook for back taxes, interest and penalties, should any of their creative credits and deductions turn out to be bogus. When the IRS claims what it is owed, it can go so far as to attach your wages and Social Security and even place liens on your property.
5. Attempting to dodge your tax debt
It's no coincidence that Al Capone went away for income tax evasion. Sooner or later, the IRS will come for you. That is why it is always best to respond immediately to any IRS correspondence. Sticking one's head in the sand or going "off the grid" to avoid the IRS simply isn't an option.
The current IRS interest rate is 3 percent, compounded daily, and the rate is subject to change every three months. Additionally, there's a late payment penalty of 0.5 percent of the taxes owed. This penalty is added each month to the unpaid amount, and the penalty doubles once the IRS issues a final notice of intent to levy or seize your property.
A lien can make it difficult or impossible to sell your property, preventing you from seizing a new job opportunity or complicating your divorce because tax liens block equitable distribution.
With help, you can work out payment arrangements. Sometimes, this plan is paired with a personal bankruptcy filing, which cannot discharge tax debt, but can re-order your other finances and debt.
To learn more about how Scaringi Law attorney Kelly M. Walsh can help you, call her toll-free at 877-LAW-2555 or email her at firstname.lastname@example.org.