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August 2018

Preparing for an IRS Audit: 3 Useful Tips 

Being the subject of an IRS Tax Audit can be intimidating. No matter how well you keep your records, being under such scrutiny can still make you hesitate. Nevertheless, an IRS audit shouldn’t make you nervous. The most important aspect here is to make sure you have complete, accurate documentation of your financial activity.

There are three different types of IRS audit you could be subject of. A correspondence audit, on which the IRS basically asks you to send them information to correct their records. This is the easiest, fastest one. An office audit, which requires you to go to an IRS office and bring specific documents. With a field audit, though, an IRS tax officer will visit your place of business and request any file or document they might consider necessary.

Regardless of the type of IRS audit, they decide to carry out, you must consider these three key concepts. Having all your documents ready does nothing but help your case. A professional attitude is a must. Also, remember you can always appeal the results if you don’t agree.

Get All Your Documents Ready in Advance

Some might say that the most important aspect of filing your income tax return. This is something that shouldn’t really be done when the due date is coming, but all year round. Being able to keep an accurate, complete record of your income and expenses is the best way to avoid an IRS audit in the first place. If you keep a tidy record and still get a notice from the IRS, you have the peace of mind that your documents are all in one place.

However, if you need to go through the process of getting documents again, don’t worry. Just start gathering your information as soon as possible, to make sure you come up with a record as complete as possible. Get in touch with as many people as possible. Bank statements and paystubs shouldn’t be a problem to get. Banks usually keep statements up to 18 to 36 months old. If you’re not able to gather every paper, document your attempts to collect them anyway.

Be Confident and Stay Professional During the IRS Audit

When the time of the IRS audit comes, we recommend hiring a professional tax consultant. This will ensure the audit follows protocol as much as it should. Not only that, but you know they won’t ask more questions than necessary. More importantly, you make sure you don’t give more information than necessary, either.

If you decide to attend the audit by yourself, remember to remain confident and to stay professional throughout the meeting. If at any point you feel the tax auditor is asking more than required, remember you have the right to interrupt the meeting and ask for a tax consultant before going any further. This will not only give you more time to get any missing paper but make the audit loosen up a bit. You can use this in your favor if it happens.

Don’t Be Afraid of Appealing the Results

Once the audit has finished and the results disclosed, keep in mind you still have the option of appealing. Usually, requesting to speak with the auditor’s manager is all it takes for them to reconsider the resolution. After that, if the outcome is not what you expected, you can appeal the results through an IRS program called Fast Track Settlement. You will meet with an Appeals Officer and present your case. This can take a couple of hours, but the result might be in your favor. If you still can’t reach a settlement, you can still submit a formal protest with the IRS Appeal Division, but this might take more than 6 months.

At this point, the only action to take left is taking the case to court. Once you get here, they only give you 90 days to respond to the IRS Notice of Deficiency. If you fail to respond, the IRS will close your case and assess the results you were disputing.

This is why we always recommend hiring a professional tax consultant. This is the best way to avoid receiving an IRS audit notice. If you still get one, though, your tax pro will know how to handle the situation, and most likely, get a resolution that favors you.

 

 

Why Do I Need A Tax Consultant? 

If you ask your friends, your family members, and even your neighbors, most of them might say that you don’t need a tax consultant. After all, research shows that 33% of Americans take care of their tax report themselves. Another 56% say they hire a tax consultant to deal with the hassle instead. The missing 11% were apparently confused by the question. If more than half of the country decides to work with a tax advisor, it might be worth it.

There are several reasons why it makes sense to hire a tax consultant. Even when it might represent an additional expense on our budget, the advantages are more. Firstly, they are experts in the matter, they have to stay updated with IRS tax code changes, and they could even help you get a higher tax return.

Tax Consultants Are the Pros

Tax advisors are accounting professionals who must obtain different certifications in order to provide guidance and consultation services. They must pass different annual regulatory tests to keep their licenses, too. This means tax consultants are more familiarized with the IRS Tax code, they know how the system works, and you might benefit from such knowledge.

Just like you would hire a professional contractor for your home improvements, or a professional doctor for your medical needs, you want should want to hire a professional tax advisor to take care of your tax duties.

Tax Consultants Are Updated with IRS Tax Code

The IRS Tax Code is about 2,600 pages long, without including additional explanations and resources. Every year, there are different Tax Law changes and reforms. Tax consultants must keep up to date in regards to those modifications. This is particularly important if you’ve been doing your taxes yourself. There might have been updates you were not aware of until now.

If you worry about making a mistake when filing your taxes, tax consultants will give you the peace of mind you needed.

You Might Be Able To Get A Higher Tax Return

Coming back to what we mentioned before, tax consultants know how the system works, and this can benefit you. Since most consultants also provide financial advice, they can guide you year-round so you can make smarter monetary decisions. This, in turn, can ensure that, when the time is due, you get a higher tax return.

Hiring a tax consultant can have great benefits in the long run. Whether you want it for your business or for your personal expenses, choosing the right consultant for you will definitely show results.

 

What Can Happen If I Don’t File My Income Tax Return?

Most of us have been in the situation of almost forgetting to complete our Income Tax Return files, whether it is because of our hectic schedules, stress, work, family life, or whatnot. Maybe it only slipped our mind this one time, or there might even be someone out there who thought their income did not reach the amount required for a tax return to be necessary. 

Whether it was because of a lack of time, a distraction, or a misbelief, failing to file income tax return, or to pay the corresponding bill, if it happened to be the case, can have several consequences, from fines and penalties, to losing our refund, and even ending up doing some time in jail, and regardless if we face them or not, it all stays on our record for the Internal Revenue Service agency, and will eventually catch up with us. 

Penalties and Interests 

There are different penalties to which we can be subject, depending on our particular case. If we forgot to file our income tax report, or if we simply didn’t by the established deadline, we will be subject to a penalty of 5% of the unpaid taxes, this for each month that we fail to report, with a maximum penalty of 25%. The maximum amount we can pay as a penalty is of $135, however, after we’ve reached the limit penalty amount but still haven’t paid the owed taxes, such balance will start accruing interests, which cannot be waived by the IRS. 

In the event that we had filed our income tax return, and ended up owing a given balance, but failed to cover such payment, there are still penalties that apply, but they are lesser than when we fail to file. The failure-to-pay penalty consists of 0.5% of the unpaid taxes for every month we pay late, and this penalty also has a maximum of 25%, and just as the failure-to-file penalty, will start accruing interests after the maximum percentage has been reached.  

Missing Refund 

We must keep in mind that the penalties above apply for those of us who ended up owing taxes to the IRS, and not being eligible for a refund as a result of having over-paid taxes during a given tax year. However, there can still be consequences if we fail to file our income tax return and instead of earning a balance to pay, we qualified for a tax return refund. If this was the case, we would not be eligible to receive such refund, and we would have to cover any pending balance we might owe for previous years. 

Property Seize and Imprisonment 

Being subject to penalties and losing our refunds are not the only consequences of failing to file our income tax report. Depending on the amount that is owed, and if there happened to be an audit, you would eventually receive notifications to cover the debt. If we don’t take action and decide to ignore those notices, the IRS can (and will) seize of your property in order to collect the payment. Imprisonment for tax evasion is not really common, but it is possible, especially if we deliberately failed to report additional income, committing tax fraud in order to not pay taxes for those balances.

3 Tax Tips for Small Business Owners

Whenever we decide to start our own business, chances are we will find ourselves (if we haven’t already) struggling to keep the boat afloat financially, and whether we obtained a business loan, or went to our family savings account in order to keep the funds flowing through the veins of our company, one of the main obstacles small business owners face during the first couple of years of our enterprise has to do with its capital.  

You may not know this, but there are several tax return tips and tricks that might be useful, and that can help us receive some of the money we are investing in equipment and resources to keep our company working back to our business budget, allowing us to invest such money again,  improving our operations, facilities, and therefore making our company more profitable.  

Do Use Tax Software 

One of the best ways to save money on our company budget is through purchasing tax filing software to help us with preparing and filing our tax reports online, and there are several options out there that will do so in an accurate, reliable, and timely manner. By doing so we can make sure that we are not being eligible for an IRS fine or penalty fee due to an error in one of our spreadsheets or paper reports that could have been easily corrected by using specialized software. 

According to the IRS, online tax reports submitted online that have errors sum up to 1%, and reports submitted through paper go up to 21%, which makes online filing more accurate and reliable than paper. If you’re not willing to take the chances and 99% accuracy still won’t do it for you, hiring a tax specialist to double check the software reports wouldn’t hurt. 

Home Office Is Deductible 

A common situation among small businesses and young startups is beginning to run operations based on home office settings, as renting a dedicated space for our company might go beyond our initial budget or funding capabilities. Well, turns out this tight situation might be an advantage for you, since expenses that are generated by Home Office activities can be deductible, but you have to make sure that there is a room or a part of your home that is used exclusively for business, and never for personal use, in order for it to be a legitimate claim. 

If you are not sure about what percentage of your home is actually being used for your business, there is a simple rule to get an accurate idea of how to divide the cost of utilities, rent, maintenance, mortgage, and any other house expense. All you need to do is measure your workspace and then divide that by the square footage of your home. This will give you a clear idea of just how much falls under the Home Office deduction. 

Use Your Own Car Instead 

Just as it happens with home offices, acquiring a designated car for our company may be a luxury that small business owners might not be able to afford during the first couple of years of operations, and using our own car is the only option available. Car usage for business can also be deductible from your tax return, just like when we claim a Home Office deduction, we need to calculate what percentage of our car use and expenses are generated by business operations. 

We can determine how much we are using our car for business by keeping track of mileage that we drive for business and then divide that by the total mileage of the day, week, or month, however you decide to track it. We can take advantage of several apps to helps us keep our records as accurate as possible. This can also help us realize what percentage of gas, insurance, and repairs will be added to our business tax report.