Taxes

What’s Your Audit Risk?

by Chris on January 30, 2012

in Personal Finance,Taxes

If history is relied on as an indicator of auditing frequency, then it is likely that less than 1% of eligible Americans will face being audited by the IRS this year. Some of these audits are done on a random basis and nothing can really be done to prevent them. Most audits, however, are actually instigated by the behavior of the taxpayer.

There are several red flags that can be raised by imprudent filing of income tax returns. Knowing what these red flags are can keep you out of serious trouble with the IRS. When filing income taxes, all current accounts, savings accounts and sources of income should be checked for accuracy to make sure no misleading claims are filed.

Valuing Donations

One of the things that should be avoided is the overestimation of donated amounts. The government likes to see people donate items such as food and clothes and even automobiles to charities. Since these are used items, it is difficult for charities to put a value on them, so it is left up to the donator to make the estimate. Vastly over-inflating these amounts is going to draw the attention of the IRS and have them audit you before you know it. Place a fair value on your donations and there will be nothing to worry about.

File Your Return With Care

Many people file their own tax returns. As a result, math errors occur on a regular basis. While there may be nothing suspicious about the actual income tax return, a math error will get noticed and the return is much more likely to be audited. To avoid this, try to be very careful and go over your return several times. There are several very good tax software programs on the market that should help avoid this problem. Read all slips carefully and enter the data correctly.

Don’t Forget To Sign

People often forget to sign the return. This has serious consequences since this simple fact can almost guarantee you will be audited. Make sure to sign all areas that have to be signed. Even forgetting one signature will mean that the IRS will want to check your return.

Log All Sources Of Income Accurately

Another area where people run into trouble is under-reporting their income. Many people work independently or receive tips as part of their wages. There are no employers to automatically keep track of income. While it may be tempting to leave out some income, it is never a good idea and should be strictly avoided. The IRS is smart and will not be fooled for long.

Be Honest With Your Deductions

Having a home office is a great thing, but not if you grossly over-estimate home deductions. Some deductions are perfectly warranted, but if you try to claim large amounts of money for dubious items, this will raise flags. Those who earn $100,000 or more every year have a much higher incidence of being audited than people who earn less. There is nothing much that can be done about this, but keeping all current accounts scrupulous will avoid getting into trouble with the IRS.

This post was written by Louise Tillotson on behalf of MoneySupermarket.com

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TurboTax coupon

With the $1000 challenge looming, I’m on the hunt for deals everywhere. Yesterday my W2 arrived in the mail, which can mean only one thing — it’s tax time!  This is an exciting time for me as a personal finance geek.  My year of hard work keeping all my receipts organized is finally paying off.  I don’t know about you, but I can’t imagine having to complete all the tax forms myself or shelling out a ton of cash for an accountant.  I use Turbotax because it’s convenient and strangely fun to use.  And so did 19 million other households last year apparently, according to Intuit, the publisher of TurboTax.

Enjoy this coupon for up to 40% off of your 2010 tax prep fees.  It’s an affiliate link through Bank of America, but you don’t have to be a BOA customer to use it.  When you reach the landing page, be sure to click “Continue.” The offer is good for $20 off the deluxe edition, $25 off premier, and $25 off home and business.  This is the best deal I could find online — if there’s a better one out there let me know and I’ll post it.

TurboTax is Easy, Free Edition, Fast Refund

Enjoy this coupon for up to 40% off of your tax prep fees.

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Believe it or not, it’s time to start preparing for 2011.  One of the critical questions for financial planning for 2011 is what is the new 401k contribution limit going to be for your 401k or other retirement plan?

The 2011 401k maximum contribution will remain at $16,500 in all likelihood.

The IRS doesn’t offer a figure on its website, but it does mention that future increases in the tax deferred ceiling for 401k contributions will only occur due to increases in the cost of living adjustments (COLAs) .  This index is down year over year, so it’s unlikely we’ll be getting a bump up.  This means that the maximum on Roth IRA’s will also stay the same.

Below you can see the historical contribution limits:

 

10/28/2010 Update: The IRS announced last week that the 2011 401k max contributions will stay the same next year at $16,500 so my prediction played out.

 

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I didn’t have a FSA last year (Flexible Spending Account), but this year I was hell bent on saving as much money as possible on my taxes… so I thought I better take advantage of the option to put away some money tax free for inevitable health care costs.  I analyzed my previous year’s medical expenses and figured that $1000 would be a conservative estimate.  So I enrolled in the company  plan… I’ve participated this year… and I won’t be doing it again.

Here’s why:

1. Flexible Spending Accounts = Inflexible

You gotta use it or lose it.  You can’t roll money over from year to year — although your plan may provide a grace period at the beginning of the following year.  What’s the advantage of the tax savings if you don’t spend all the money?

Some plans offer a debit card which is an added convenience, but I’m not so lucky. That means that I have to collect and submit all of my receipts manually and in advance  and get reimbursed later. As convenient as it would be to have a debit card, there is still the inconvenience of having to submit receipts regardless.

I also have to make sure that I’m submitting the right receipt that includes the eligible services rendered.

Claims can’t be submitted online. They have to be faxed or mailed which is kind of old school.  In addition, the claim form is much more complicated than a standard expense report.

These accounts can only be used for certain health care expenses. Trying to decipher the guidelines and figure out if an expense is eligible is like reading a pharmacology textbook, something I would rather leave to med students.

[click to continue…]

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