Tax season, a period of time that is more often dreaded than not, can cause many of us taxpayers distress as we empty our pockets for Uncle Sam. As the April 15th deadline quickly approaches, some of us prefer to let the pros handle our returns, while others save money by filing themselves. Whatever approach you take, if there’s anything you should remember from all the tax tips you come across, it’s this:
You are responsible for your returns, even if it’s your tax preparer fault
As you get ready to file this tax season, remember that just because you’re paying a professional to handle your returns, doesn’t mean you’re not liable if they make a mistake on your tax forms. Small errors can lead to discrepancies, which can trigger an IRS audit. And if you’ve paid less in taxes than you were supposed to, you may end up paying for it in back taxes, interest and penalties.
Don’t assume your CPA (Certified Public Accountant) is going to absorb your fees either. Some accountants who value their reputation may do so, but it’s not common. Larger tax companies may provide a better sense of security should an issue arise, as some promise to cover any penalty fees and provide support if you’re audited. Either way, it’s up to you to make sure you provide tax professionals with accurate information regarding all taxable income you may have earned in 2014. Don’t forget that this also includes earned income from investments and retirement accounts.
You need to keep records and receipts for 3 to 6 years after you file
Yes, you read correctly. This is what the IRS recommends. It includes the receipts you saved for your business, the contributions you made to your favorite charities and your medical expenses – just to name a few. Basically, anything that supports an item of income or a deduction, or a credit appearing on a return. Motley Fool provides a list of documents, which you should keep:
• Filed tax returns
• Charitable donations. You must keep receipts, make sure they come from qualified tax-exempt charities, and get a qualified appraisal if you are making a noncash donation of more than $5,000.
• Mortgage interest payments
• Educational expenses
• Medical and dental expenses
• Noneimbursed business expenses
• Tax preparation fees
In other words, don’t go paper-shredder crazy during your annual spring-cleaning. You need to be able to provide solid documentation for anything you may have received a tax credit for on your returns just in case you’re unfortunate enough to get audited by the IRS.
What happens if you don’t have proof? Well, you’ll just owe the government a lot of money in back taxes.
Don’t Embellish or Understate Deductions and Tax Credits
There’s a lot of fraudulent practice when it comes to writing off all sorts of items, such as business meals, travel, entertainment, transportation, fuel, utilities, rent and more, in order to receive tax credits and deductions. Some less honorable CPA’s may even over embellish these deductions for you on your returns (remember, you’re responsible).
While you may think it’s a small fib, or something insignificant, the IRS is specifically looking for people who think they can get away with these ‘white lies’. Contrary to what some believe, the IRS targets more small business owners and high net-worth individuals, than they do larger corporations.
Their programs will automatically flag you for an audit if it notices your deductions are outside of the average for your income. For example, if your annual income is $100,000 and you are deducting $40,000 in medical expenses, it is likely you will be audited.
Now, if you are truly entitled to these deductions and tax credits and can provide supporting documentation, you should try to take advantage of all that you’re eligible for. You shouldn’t fear an IRS audit if you are following the rules and can prove it.
Additionally, you should never understate deductions on your returns, because you think it could help avoid an unnecessary audit – there’s no reason to pay the government more than you should!
Just remember, when hiring a CPA or a tax professional to prepare your returns, ask them questions. Ask them how they’ve handled previous client’s IRS audits and if they cover any penalties and fees that may result. Requesting that your tax preparer signs and stamps your income tax form, is another way to hold them accountable should they make any errors when preparing your return.
Don’t shy away from requesting credentials, either. Any tax professional that gets annoyed, may just be a sign to look for another person to prepare your returns. It’s absolutely essential to find a professional that has an honorable reputation and is current on all regulations, tax credits and deductions. Otherwise, you may be paying the IRS more than you should. What’s even worse, is paying someone who doesn’t know what they’re doing to handle your taxes.