May 9, 2012 – In IRS Revenue Procedure 2012-26, the IRS has announced the new inflation-adjusted increases for Health Savings Account (HSA) contributions and high-deductible health plan (HDHP) deductibles.

To qualify for an HSA, you must have a high deductible health insurance plan and no other health insurance. Linda Wallace, CPA, CEBS, senior manager at Carmel, IN-based CPA firm Blue & Co., points out that, “Once you go on Medicare, you can’t continue to fund your HSA,” however, the HSA can be regarded as a long-term tax-free investment to be used to cover future medical expenses.

The contributions to an HSA are tax deductible, as an above-the-line deduction, in the year in which they are made. Withdrawals are tax free as long as they are used for qualified medical expenses.

These amounts apply to the 2013 calendar year.

• The maximum annual contribution to a self-only HSA for HDHP coverage increases from $3,100 to $3,250 for 2013.
• The maximum annual contribution to a family HSA for HDHP coverage increases from $6,250 to $6.450 for 2013.
• The age 55 and over annual catch up contribution remains at a $1,000 for 2013.
• The minimum self-only HDHP deductible increases from $1,200 to $1,250 for 2013.
• The minimum family HDHP deductible increase from $2,400 to $2,500 for 2013.
• The maximum self-only HDHP out-of-pocket expense amount (which includes deductibles and co-payments as well as other expenses) increases from $6,050 to $6,250 for 2013.
• The maximum family HDHP out-of-pocket expense amount (which includes deductibles and co-payments as well as other expenses) increases from $12,100 to $12,500 for 2013.

Talking Points Linda Wallace, CPA, CEBS, senior manager at Blue and Co., CPAs, in Carmel, Indiana, makes these points about Health Savings Accounts:

• HSA funds are accumulated tax free
• Withdrawals are tax free when used for current, qualified medical expense reimbursements.
• Clients who choose not to use HSA funds currently can use the HSA as an investment for the future.
• Withdrawals from an HSA can be made at any time; the account holder needs to retain receipts for the expenses.
• Medicare recipients are not eligible to make contributions to an HSA but they are still able to draw on the account to reimburse for qualified medical expenses.
• Companies considering setting up HSAs for their employees consider the expenses that will be charged by the HSA custodian.

By AccountingWEB Staff

Harvey Silverglate’s new bookThree Felonies a Day argues that a combination of vague laws and changing technologies has led the average American to unwittingly break the law daily. That got me to thinking of an analog in the tax world: Most of us, I fear, mess up tax issues every day. No, these mistakes aren’t felonies. But you don’t want to end up next April 15 having logged 365 days of tax mistakes.

Here are three tax rules many of us break almost daily. Respect them, and you’ll reduce the chance of coming to grief with the Internal Revenue Service.

1. Keep business and personal affairs separate.

It may be overstated to say that never the twain shall meet. You may often do things with a dual motive–say having a pleasant lunch with a business colleague, going on vacation with your best client or buying a vacation home that you also intend as an investment.

For more tax coverage, follow Forbes planning on Twitter.

However, you’ll be better off if you can separate your tax life into business and personal. That may sound radical, but it’s really just following the tax code. As I look back over a 30-year career as a tax lawyer, I can think of many big, messy and expensive tax disputes that came down to a violation of this fundamental divide.

The person who forgets this rule and tries to morph personal matters into business ones is asking for trouble. I’m thinking of people who:

* Try to deduct the cost of their divorce because their business is at risk.

* Try to deduct a miserable vacation with their best client.

* Claim their hobby activity as a gentleman farmer or horse breeder was really engaged in for profit. (If you do engage in a business that the IRS might construe as a hobby, click here for more advice.)

Sure, there are many provisions in the tax law that explicitly recognize the dual purposes many of us have in pursuing activities and purchases. Still, try to avoid such dual-purpose goals and do your best to categorize things appropriately. II think you’ll find your tax life to be easier.

2. Keep good records.

Most of us at one time or another violate this edict. You might think keeping good records is only something that can help you if you actually end up in a tax controversy. Yet believe it or not, there is something about keeping good records that can keep you out of tax trouble in the first place. Maybe it’s karma.

Moreover, this rule isn’t just for people who run businesses. For example, recreational gamblers (yes, even retirees playing the slots) need to keep a diary or other contemporaneous record of how much they bet and lose on each visit. That’s because your occasional big win will be reported to the IRS by the casino. You can use gambling losses to offset your winnings. But if you don’t keep good records you could end up a two-time loser–losing once at the tables and once to Uncle Sam.

Another example: charitable donations. Put a $20 check instead of a $20 bill in the collection plate. The law requires you to have paper proof of every donation you deduct.

Does the IRS really care about this sort of record keeping? Yes. Most of the audits conducted on ordinary, law-abiding folks (meaning wage earners without undisclosed offshore accounts), are so-called correspondence audits. In such audits–and you might be picked for one if you deduct a lot of contributions–taxpayers are told their deductions will be disallowed unless they promptly mail back records substantiating them. (For more on how IRS mail handling problems can turn one of these audits into a mess, click here.)

3. Respect and keep those 1099s.

This may sound like an April 15 only item. In fact, how you handle third party “information returns,” such as 1099s, year round will influence how hard a time you have when you file your return and interact with the IRS thereafter.

Whether you are payee or payor, you need a system to record and track these information returns. After all, that’s exactly what the IRS does. A lot of what goes on at the IRS is computer matching–the endless correlation of taxpayer identification numbers and payments. Even a small mismatch between what’s on these forms and what you report on your tax return will be caught and could result in months of hassles with the IRS. Much of what the IRS does, when it comes to monitoring taxpayers, is information return matching.

There are different forms for miscellaneous income (Form 1099-MISC), for interest (Form 1099-INT) and so on. There are also a few information returns that you may receive showing how much you paid. For example, if you have a home mortgage and make mortgage payments, you should receive a Form 1098 from your lender reporting how much interest you paid during the year. When you deduct interest on your tax return, the IRS will match your return to this form to make sure you haven’t overstated your deduction. Another common information form is a Form W-2, issued to employees reporting wages.

Pay attention to these little forms as they arrive. Confusingly, these days you may get a statement from your bank that looks like your regular statement, but says somewhere it is a 1099. When you get your 1099s, don’t just stick them in a drawer. Look at them. Payors are required to mail all 1099s to payees no later than Jan. 31. Then, the payor has another month (until Feb. 28) to send all of its 1099s to the IRS. This one month lag means that if you receive a 1099 you know is wrong, there may be time to correct it before the IRS receives a copy.

If you receive an incorrect 1099 (and this is common), contact the payor who issued the erroneous form as soon as you receive it. Explain the error and ask whether they have already sent a copy of the 1099 to the IRS. The best corrections are done this way, with the payor simply destroying the old form and issuing a new and correct one. It’s a good idea to keep a record of such communications, since you may end up ensnarled in a reporting mess later on. If the payor has already sent a copy of the erroneous form to the IRS, you can still ask for a correction. In that event, the payor should issue a “corrected” 1099 (there’s a special box for this).

If you are a partner in a partnership, a member of an LLC or a shareholder of an S corporation, you also should receive a Form K-1 for each year, reporting how much gain, loss or income is being attributed to you. Normally, it must be mailed to partners/shareholders no later then March 15, giving them one month to meet their own April 15 deadline. But some entities are notorious for being late in mailing out Forms K-1. You may find yourself unable to file your personal tax return until you receive just one more Form K-1. If it doesn’t come, file a request for an extension. It’s easy and the IRS will automatically grant it. (For more on what to do if you can’t file on time, click here.)

Robert W. Wood is a tax lawyer with a nationwide practice (www.woodporter.com). The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments(4th Ed. 2009 www.taxinstitute.com), he can be reached at wood@woodporter.com.

See Also:

Even The IRS Has Time Limits

In Pictures: Ten Tips For Taming The Tax Cops

How To Cheat Like A Pro

No one likes organizing records. If you just finished your tax return filings the last thing you want to do is look at them again. But now is the perfect time and it pays dividends. Here’s why.

If you’ve ever tried to tell the IRS “I lost my receipt” you don’t want to do it a second time. The IRS has heard every excuse in the book. See IRS Publication 552. You’ll find it far easier if you don’t have to go to the additional effort of proving something by another means.

In cases of natural disasters traditional record-keeping can go haywire. The IRS suggests creating a backup set of records stored away from the originals. Another idea is to document valuables by photographs or videos. See IRS Publication 584. For employers using a payroll service, ask your payroll service if it has a fiduciary bond. See IRS Publication 583.

Here are some other IRS resources on this unpleasant but necessary topic: Tax Relief in Disaster Situations and Frequently Asked Questions for Disaster Victims.

If despite such safeguards, you still end up missing receipts, don’t give up. Other evidence is sometimes enough to convince the IRS or the courts. Receipts are best, but if you can’t find one, remember the Cohan Rule.

George M. Cohan was a Broadway pioneer whose hits included “Give My Regards to Broadway” and “Yankee Doodle Boy.”  His statue still commands Times Square. But the IRS disallowed Cohan’s travel and entertainment expenses for lack of receipts.

He took the IRS to the Board of Tax Appeals, predecessor to today’s U.S. Tax Court. When it upheld the IRS, Cohan appealed to the Second Circuit. It rocked the IRS back on its heels with the Cohan Rule. See Cohan v. Commissioner. To this day, it is an exception to stringent IRS recordkeeping requirements, allowing taxpayers to prove by “other credible evidence” they actually incurred deductible expenses.

The Cohan Rule is most classically applied to travel and entertainment, but can apply to virtually any item not specifically subject to heightened substantiation requirements (such as certain travel and meal expenses, passenger automobiles, computers and cell phones). If the IRS is convinced by oral or written statements or other supporting evidence and a reasonable approximation can be made, you may be entitled to the expense despite your lack of documentation.

Even charitable contributions have been allowed under the Cohan Rule, except where special substantiation requirements apply. Those rules require you to have a receipt even for small cash donations, including $20 put in the collection plate on Sunday and (for donations of more than $250) a contemporaneous written acknowledgement from the charity before filing your tax return. For more about the Cohan Rule, see What If A Taxpayer Doesn’t Have Receipts?

See also:

Need A Tax Receipt?

What If A Taxpayer Doesn’t Have Receipts?

Keep Tax Records In The Vault!

Sometimes, Tax Receipts Are Optional

When Fighting IRS, Should You Pay To Stop Interest?

Dispute Your Tax Bill, But Not IRS Regulations!

Choose Your Ground In Tax Disputes

Ten Things To Know About Fighting An IRS Bill

Giving To Charity? Great. Staying Off IRS Radar? Priceless.

Three Tax Mistakes You Make Every Day

Robert W. Wood practices law with Wood LLP, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

The tax deadline may have just passed but planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time, money and headaches in 2013. Here are eight things you can do now to make next April 15 easier.

1. Adjust your withholding Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you’d prefer more money in each paycheck this year. If you owed at tax time, perhaps you’d like next year’s tax payment to be smaller. Use IRS’s Withholding Calculator at www.irs.gov or Publication 919, How Do I Adjust My Tax Withholding?
2. Store your return in a safe place Put your 2011 tax return and supporting documents somewhere secure so you’ll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year’s return.
3. Organize your recordkeeping Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.
4. Review your paycheck Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.
5. Shop for a tax professional early If you use a tax professional to help you strategize, plan and make financial decisions throughout the year, then search now. You’ll have more time when you’re not up against a deadline or anxious for your refund. Choose a tax professional wisely. You are ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at www.irs.gov.
6. Prepare to itemize deductions If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. See the Schedule A instructions for expenses you can deduct if you’re itemizing and then prepare an approach that works best for you.
7. Strategize tuition payments The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires. For more information, see IRS Publication 970, Tax Benefits for Education.
8. Keep up with changes Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through www.irs.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during summer and tax season. Special Edition tips are sent periodically with other timely updates.

The IRS emphasizes that each household’s financial circumstances are different so it’s important to fully consider your specific situation and goals before making large financial decisions.

President Obama and the First Lady managed to do something that many taxpayers haven’t yet done: they have filed their  federal income tax returns for the 2011 tax year(downloads as a pdf).

Like most married couples, President Obama and the First Lady file as married filing jointly. They also itemized their deductions, something that about one-third of all taxpayers will do in 2011.

In total, the Obamas reported adjusted gross income (AGI) of $789,674. About half of that was the President’s salary; the other half is from sales proceeds of the President’s books. The Obamas reported just over $10,000 in interest and a remarkable $3 in taxable dividends. Nope, not a typo, just $3, which means that I will report more in taxable dividends this year than the President.

Like many taxpayers, the Obamas had another tough year with investments. Together with losses from prior years, they reported a capital loss of $119,151 for 2011. However, under the law, that amount was capped for tax purposes as $3,000.

The Obamas claimed $278,498 in itemized deductions. Of that, they reported $172,130 (or about 20% of their AGI) to a number of charities. The largest single gift was a $117,130 contribution to the Fisher House Foundation. The Fisher House Foundation serves as kind of a Ronald McDonald House for military families, providing a home away from home for families while veterans are hospitalized.

Not surprisingly, since they are high income taxpayers, the Obamas were subject to the alternate minimum tax (AMT) for 2011 of about $12,000.

The First Family paid $162,074 in total federal income tax, giving them an effective federal income tax rate of 20.5%. With withholding and estimated payments of $186,589, this resulted in an overpayment. The Obamas were entitled to a refund totaling $24,515, but instead chose to apply that towards next year’s tax return.

The President and First Lady also released their Illinois income tax return and reported paying $31,941 in state income tax.

Also due by April 17, 2012: federal gift tax returns. The President and First Lady filed federal gift tax returns showing that they split gifts. The First Family opted to contribute more than the annual exclusion amount to 529 plans in 2007 and spread that amount out over five years for federal gift tax purposes.

The Vice President and Dr. Jill Biden also released their 2011 federal income tax returns (downloads as a pdf), as well as state income tax returns for Delaware and Virginia.

Like the Obamas, the Bidens filed as married filing jointly. They, too, itemized.

Most of the Bidens income came from salary with additional monies from Social Security and pension. I will also report more in taxable dividends this year than the Vice President: he and his wife reported none.

The Vice President and Dr. Biden reported adjusted gross income of $379,035. Of that, they reported $5,540 (or about 1.5% of their AGI) to a number of charities. The largest single gift was $1,080 made to Northern VA Community College Alumni Scholarship Fund.

The Bidens, like the Obamas, were subject to the AMT for 2011.

The Bidens paid $87,900 in total federal tax for 2011, giving them an effective federal income tax rate of 23.2%. They paid $13,843 in Delaware income tax and $3,614 in Virginia income tax.

Most tax professionals would say that the Bidens planned a little better than the Obamas since the Bidens owed a small amount ($237) in federal income tax. Ideally, you want to get as close to zero as possible, not owing thousands and not being owed thousands (why let the government use your money for free all year?).

It’s worth noting that neither the Obamas nor the Bidens would have been effected by the s0-called “Buffett Rule” that President Obama has proposed: that rule would impose a surcharge on those taxpayers reporting more than $1 million in income. However, both the Obamas and Bidens would have seen their tax bills go up had the “Bush tax cuts” been allowed to expire.

Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl), hang out with me on Facebook, pin something to my Pinterest board or check out my new YouTube channel.

Audit risk is a worrisome topic. See More IRS Audits Coming Your Way. This tax filing season you have a precious few more hours to file, until the end of April 17. SeeDon’t Put Off Taxes Despite Leap Year and Emancipation. Even though it’s a DC holiday that prompted the one day reprieve this year, many states conformed.

But what if even that isn’t enough? Is it good or bad to go on extension? The best reason to go on extension is if you need time to consider proper reporting, get professional advice, and file an accurate return. Tax returns are filed under penalties of perjury. Plus, amended returns are more likely to be scrutinized, so file once accurately if possible.

Despite these truths, many people are obsessed with IRS audit risk. Of all the questions I get as a tax lawyer, one of the most often repeated is whether you increase audit risk by going on extension. I say no, but you’ll get different answers all over the map. Even worse, there are many old wives tales about what does and doesn’t trigger an audit.

Some say going on extension increases audit risk. Some say exactly the opposite. A whopping 10.5 million extensions were processed last year, and this year could be more. To get one, you can mail in a Form 4868, ask your return preparer to do it, do it with TurboTax or other commercial software, or do it electronically yourself. Just go to IRS.gov and click here: Can’t File By April 17? Use Free File to Get a Six-Month Extension; E-Pay and Payment. For more IRS guidance, see: IRS: Tax Topic 304 Extensions of Time to File Your Tax Return.

The extension used to be an automatic four months, with two more thereafter if you had a good reason. Then the IRS went all-out and dropped the reason requirement and the two step process. Now automatic extensions are six months. Who couldn’t use the time?

One problem, of course, is that the extension is to file, not to pay. Beyond that, the first time you go on extension can be cathartic. We’re used to meeting deadlines, and you may feel guilty when you get that automatic reprieve. Don’t. Make your payment, get your extension, and use the time wisely to make your return more accurate and more complete. Plus, if there are debatable points–such as whether a lawsuit recovery is ordinary income or capital gain–get some professional advice. See Don’t Fail To Consider Taxes When Settling Litigation.

For more, see:

‘My Dog Ate It’ And Other Tax Excuses

‘Sick Lawyer’ Excuse Not Enough To Escape IRS Penalties

More Tax Defenses: “I Forgot!”

Tax Defense: “I Have ADD”

9/11 Excuse Not Enough To Escape IRS Tax Bill

To Avoid Fate Of Wesley Snipes, Skip Tax Protester Arguments

Don’t Put Off Taxes Despite Leap Year and Emancipation

Paper Or E-File Your IRS Return?

E-Filing And IRS Website

What Triggers IRS Statute Of Limitations?

IRS Six Year Audit Push May Reach Supreme Court

Robert W. Wood practices law with Wood LLP, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Who panics when being audited by the IRS? Apparently, even the professionals.

Just ask Brad F., a former CPA and current tax attorney whose 30 years experience means he’s no stranger to the tax man. Still, when the IRS notified him of an audit of his 2009 personal income taxes, he admits to feeling more than a little nervous.

“It is a nerve-wracking experience,” says Brad, who asked that his last name be omitted to protect his privacy. “I was overcome with anxiety and fear that I had made a mistake.”

Uncle Sam comes calling

According to the IRS, taxpayers are notified of audits either by phone or mail. Audits are never announced via email. In Brad’s case, he received a notification in the mail that instructed him to contact a local office to set up an initial interview.

While Brad notes the IRS agents were very cordial on the phone, they balked at his plan to send another accountant to represent him at the meeting.

“The IRS did not like this,” he says. “They really wanted to meet the taxpayer.”

Only after Brad signed over power of attorney to another accountant would the IRS agree to allow a representative to speak on his behalf. It was an inconvenience, he says, but one that was well worth it since it gave him some distance from the issue.

“It was the best thing I could have done,” says Brad. “Not only did it reduce my anxiety, but it also gave me time to prepare.”

Documentation, documentation, documentation

At the initial hearing, the IRS agents gave Brad’s accountant a laundry list of items they needed for the audit. Going beyond bank statements, the audit even required him to provide documentation from a family member he had lent money to years earlier.

“All the documentation required amounted to about an 8-12-inch-thick stack of paperwork,” says Brad.

After more than three months of collecting documentation and providing the requested information, Brad and his accountant returned to the IRS office to hear the determination. Within all the documentation, the IRS found only one error, which meant a relatively minor change to Brad’s return.

Tax audit tips

If you find yourself on the receiving end of an audit, here are five tips that can make the process go more smoothly.

1. Be prepared and be honest: Be proactive by keeping detailed tax records that can support every deduction, credit and exemption. Remember, the IRS can go back seven years. To eliminate the paper clutter, scan your records, back them up at least twice and then shred the originals.

Above all, fight the urge to cheat on your taxes. An honest return may not prevent an audit, but it is easier to defend.

2. Know that audits can happen to anyone: Brad has no idea what triggered his audit, and many who face them may never learn the exact cause. However, Paul Jones, a CPA and tax attorney from Salt Lake City, Utah, says some individuals are more likely to win the audit lottery.

“The most common problem is not reporting something on your tax return that was reported to the IRS by a third party,” says Jones. “The IRS also looks for certain hot button issues they know are being abused by a certain segment of unethical tax preparers.”

According to Jones, these include earned income, education and child tax credits. Other things that can trigger an audit are large deductions, math errors and under-reported income.

3. Get representation: Even if you file your own taxes, you are entitled to representation by a certified public accountant, attorney or enrolled agent. It may be pricey, but the professional fees could be less than the interest or penalties applied by the IRS. Brad notes that not all accountants or attorneys have experience working with the IRS, so taxpayers should look for someone with a proven track record.

4. Don’t be difficult: It may be tempting to try to make the field agent’s life a little more difficult, but Jones cautions that could backfire.

“There are persons who believe providing a shoe box full of receipts is a strategy to frustrate the IRS and get out of an audit,” he says. “However, in my experience, the IRS agents typically just deny deductions if they cannot find the corroborating evidence to support it.”

5. Exercise your right to appeal: Finally, remember that even the IRS is fallible.

“You do not have to accept nor should you accept the IRS position,” says Brad. “You can argue your position.”

Within the IRS, a notice of determination can be negotiated with the field agent and then appealed to a manager and then to the appellate level before going on to tax court.

The virtues of preparation

While no one jumps for joy at the prospect of an audit, there is little to be gained by sweating it out. You can minimize the frustrations of the process by getting organized, getting help where you need it and getting acquainted with your rights.

Want to learn more? Jones recommends all his clients stop by the IRS website to view their video guide on audits.

It’s T minus 13 days until Tax Day and tax pros everywhere are scrambling to get returns prepared on time. It’s easy to get carried away since everyone is in a hurry. But slow down and think… Here are the top eleven things your tax pro doesn’t want to hear from you this month:

1. Wow, my taxes are so steep, I can’t afford to pay you now. Seriously? I get that nobody wants to pay their taxes. But the person who is preparing them for you is doing you a service. You have to pay for that service. That part is not negotiable. What may be negotiable is the timing of the payment since many tax pros are happy to work out a payment plan but those plans should be worked out in advance. If you haven’t discussed otherwise, your tax pro is going to expect payment at the time that services are rendered. They have bills to pay, too. Oddly enough, someone has to pay to keep the lights on and occasionally your tax pro wants to eat. And a well fed tax pro is a happy tax pro. And everyone loves a happy tax pro.
2. I want to meet and discuss next year’s taxes. Can we do it on Thursday? Your tax pro will absolutely love that you’re being proactive about your taxes. Planning is important. And while we might like surprises on our birthdays and anniversaries, surprises on Tax Day are rarely a good thing. So setting up a meeting to discuss how you can plan for next year is a great thing – just not right now. Your tax pro has been up to his or her eyeballs in tax stuff since January. Give them a chance to breathe, to play a little golf, to hang out with the family… Your planning can wait a few weeks.
3. But I don’t want to file an extension… Tough. Okay, maybe that’s a little harsh. But sometimes events conspire that result in the need to file an extension. Maybe you’re missing a form or you’re just a little too late in the season for your tax pro to get a complete, accurate return out to the IRS in time. It’s almost always better to file a complete, accurate return than to file an incomplete, sloppy return. Trust your tax pro on this one.
4. I forgot my Schedule K/Form 1099-DIV/fill-in-the-blank. Can I fax or email it over later? You should show up at your tax pro’s office with everything you need. If you’ve forgotten something, you should make arrangements to come back at a specific time with the information. Making a mental note to send something “later” (whatever that means) is not the best system. What if you forget? Or the fax machine is out of paper? Or your scanner doesn’t work. There’s just so much room for error. Be organized. And if an accident happens – because they do – then make solid arrangements to fix it.
5. I can’t find my receipts but I can give you a pretty good guess. You’re doing yourself a disservice if you can’t actually produce your receipts since most taxpayers tend to understate – not overstate – their deductions when they guess. Remember, too, that the rules require that you be able to produce your receipts if the IRS asks. If you can’t find them for your tax pro, you’re not going to be able to find them for the IRS. So either find your receipts or suck it up and take the standard deduction this year and then promise yourself that you’ll be more organized next year.
6. I have a really short tax question. Tax questions are never short. If it’s really short and relevant – and you’re a client – call and make an appointment. And if it’s about next season, then see #2 below.
7. I had surgery in December but didn’t pay for it until January. But I could really use the deduction now. Can we just say I paid it in December? Timing is important when it comes to taxes. And for most taxpayers, deductions and income are based on a calendar year. Your tax pro cannot turn back time any more than Cher can (kudos if you get the reference). Don’t ask him or her to try.
8. My ex and I have a divorce agreement about who gets to claim the kids but a lawyer wrote it and I can’t understand it. Can you figure it out? You hire a divorce attorney for a reason: to assist you in a divorce. That attorney ought to be able to explain to you in plain English what your divorce agreement says. It’s not your tax pro’s job to figure out who claims the kids this year (or next year or the year after). That’s like asking a dermatologist to read your X-rays.
9. I took my girlfriend to Vegas when I was on business so can we say she was working and claim her, too? Now, why would you ask your tax pro to lie for you? A good tax pro will absolutely make an effort to spot opportunities to help you save on your taxes. But that means looking for honest deductions, not creating bogus ones.
10. I owe more than I did last year. What did you do wrong? Even if your situation doesn’t change a whit – not even a penny – the Tax Code is constantly changing. For example, the Making Work Pay Credit expired in 2010 and was replaced in 2011 with the payroll tax cuts. The credit was a flat amount but the cuts are based on a percentage. So depending on your income level, you could see more of a cut – or less – or it might be the same. Ditto for changes in the standard deduction and personal exemptions. Don’t assume your preparer made a mistake. If you don’t understand why you owe more, ask. Nicely.
11. I’m really busy this week so I’ll stop by on the 17th to do my taxes. Whoa Nellie. Taxes are due on the 17th. And despite what your calendar looks like, I can assure you that your tax pro’s calendar is busier. While it’s true that your tax pro needs to be flexible – and you do have until April 17th to file – don’t stress everyone out by cutting it that close.

Sometimes your tax preparer is to blame for an audit. If a preparer promises unusually high refunds without asking to see proper documentation for deductions and credits, don’t be fooled, said Vincenzo Villamena, CPA and managing partner at accounting firm Online Taxman.

You have a sketchy tax preparer

You’re legally responsible for the information on your return no matter what a preparer tells you, so make sure to look over your return before it’s sent to the IRS.

“Preparers can promise you the world, but then when they deduct a bunch of stuff they shouldn’t, you’re going to be the one stuck with an audit,” said Villamena. Also, you’ll be required to repay any money you receive fraudulently.

This year, all paid preparers are required to have a Preparer Tax Identification Number (PTIN) so customers can verify that they are legitimate. Ask preparers to see their PTIN before signing up for help, and be wary if your preparer doesn’t put a PTIN on your return when submitting it to the IRS, said Villamena.

You make stupid mistakes

Whether you accidentally omitted information or you slipped up when doing subtraction, making errors on your tax return will cause the IRS to take a second look.

“The No. 1 mistake is not putting down the right Social Security numbers, and the second is not doing the right math,” said Thomas Cooke, professor of accounting and business law at Georgetown University.

It may be worth hiring a preparer to handle your return or walk you through the process, Cooke said.

“In tough economic times, people may be getting away from professionals,” said Cooke. “And as more and more people do their taxes on their own, there will be more mistakes — both in terms of math errors and the deductions that are taken.”

Take the time to double-check everything if you’re filling out your own return, and if you decide to use tax software to file, make sure you understand how to use it, Cooke advised.

You have a big mouth

You may think you’re a hot shot for pulling a fast one on the IRS. But when the friend you entrusted with your secret snitches on you in exchange for a fat check, you’re going to be in big trouble.

“Most cases start the old-fashioned way,” said Ian Comisky, a partner at law firm Blank Rome LLP who represents taxpayers whose returns were flagged by the IRS. “You blab about it to a friend, colleague, spouse or girlfriend, and one of them turns you in.”

Even your closest pals may be tempted to tattle, since the IRS offers whistleblowers a reward of up to 30% of any additional tax or penalties it collects from tax cheaters.

And with the popularity of social media, it’s now much easier to publish private information publicly. So if you did something you think was questionable, don’t post it all over Facebook.

You’re extremely charitable

It’s great to be charitable, but don’t exaggerate the amount of money or items you’re donating.

When giving small items to Goodwill or thrift stores, report the estimated resale value, not the original value. And make sure you keep track of when donations are made and hold on to receipts. It also doesn’t hurt to take photos of the donated items for your records.

“Be realistic and try to be as specific as possible,” said Online Taxman’s Villamena. “Generally, if a donation is under $250, it’s not a big deal, but if it’s over $250 you should have supporting documentation.”

If your charitable donations are unusually high relative to your income, the IRS is likely to give your return more scrutiny as well, said Blank Rome’s Comisky.

“If you have $20,000 of income and report $10,000 in charitable contributions, that’s going to raise eyebrows,” said Comisky.

You didn’t file your taxes

Talk about raising red flags: If you’re required to file a return and you don’t, the IRS will hunt you down.

The agency has ways to identify people who have filed returns in the past but stopped filing, as well as people who have never filed a return. Once you’re identified as a nonfiler, the IRS will want to know how much tax you owe and what you’re hiding, said Dominique Molina, CPA and president of the American Institute of Certified Tax Coaches.

To avoid a confrontation with the tax man, it’s better to simply file — no matter how much you’re dreading the deed, Molina said.

“Many taxpayers get overwhelmed particularly if they owe money they can’t pay, and they stick their heads in the sand,” said Molina.

But late payment penalties kick in as soon as the filing deadline passes, so if you don’t file and get caught, you could end up having to pay a lot more than your original tax bill. If you’re worried about not being able to pay your tax bill, there are installment plans available. Just ask the IRS what your best option is.

Of course, if you want to delay the pain a little longer, you can always file an extension. And if your income is below a certain level — which varies widely depending on your filing status and age — you’re not required to file a return at all. But even if you don’t have to file, make sure you’re not missing out on any deductions or credits that could actually put a little extra money in your pocket.

“Many times people build up an irrational fear over filing their taxes and in fact are due a refund,” said Molina.

You own a business

The IRS tends to look extra closely at taxpayers reporting businesses on Schedule C forms because there’s more room for fudging.

“The IRS primarily targets small businesses, especially sole proprietorships, and cash industries like pizza parlors and coin-operated Laundromats with opportunities to hide income and skim profits,” said Certified Tax Coaches’ Molina.

If you own a business, report every single bit of income you’ve received. If you’re still worried about being audited, you may even want to reorganize your business as a corporation or partnership (which means you’re not required to file a Schedule C) instead of a sole proprietorship, said Molina.

And if you’re flagged for an audit, the IRS will be skeptical of any business that looks like it’s actually a hobby, especially if you are deducting a loss on your return.

You’ve been audited before

Sometimes getting flagged for an audit comes down to having a bad reputation with the IRS.

If you’ve been audited in the past, you’re on the agency’s audit hit list for at least a few years, said Online Taxman’s Villamena. And while there’s nothing you can do to avoid being scrutinized, you should play it extremely safe to avoid getting another audit.

“If you get audited once, you have a very good chance of being audited again,” said Villamena. “For the following three years or so, you should be very careful about the aggressiveness or risk you take on subsequent returns, because the IRS is going to be monitoring you.”

You have a home office

Deducting a home office can always be a red flag, because many taxpayers consider any part of the house where they do work to be an office — even if they do other things, like watch TV or cook, in that same area.

To qualify for a home office deduction, you must use the office exclusively for work and it must be your primary place of business — not one of several offices. If this is the case, make sure you document expenses like housekeeping, alarm systems and other items you plan to claim — down to the share of utilities you use in just the office itself — in case the IRS decides to check it out.

And even if you think it’s legitimate, don’t go overboard. Georgetown’s Cooke had a client, for example, who ran a business breeding and raising high-end cats. Since the taxpayer had cats sprawled out in every room of the house, she thought it would be okay to deduct 90% of her house as a home office. While Cooke agreed that the business took up a significant portion of the client’s home, he advised lowering the percentage to about 40% so that it was less likely to raise red flags.

You’re rich

Being rich isn’t always a good thing. Your chances of being audited increase dramatically the more income you report.

While the IRS audits only 1% of taxpayers overall, those odds rose to 7% for people with income between $1 million and $5 million last year. About 21% of taxpayers with income between $5 million and $10 million were audited, and 30% of people making $10 million or more were dealt audits.

If you have a lot of income to report, make sure you get a savvy preparer so at least you’ll have everything documented should the IRS come knocking.

“The rich is where the new focus is, and it’s because of one reason — it’s generating extra income for the IRS,” said Georgetown’s Cooke. “And because upper income filers tend to have a lot more complicated returns, that makes it easier for the IRS to go after them.”

You have foreign assets

Foreign bank accounts have been a huge focus for the IRS in recent years.

In an effort to reel in taxpayers with illegal overseas accounts, the agency has launched initiatives that waive certain penalties for taxpayers who come clean. This year, the IRS introduced a program that gives taxpayers a reduction in penalties — and no jail time — if they fess up to any undisclosed overseas accounts for an indefinite window of time.

The agency also introduced a new form and filing requirements for reporting foreign assets this year. In addition to reporting any foreign bank accounts holding more than $10,000, you now also have to report any foreign assets — including pension funds and foreign stocks — totaling more than $50,000. Failing to report such assets will result in a $10,000 penalty, and any underpayments of tax on them will be subject to an additional penalty of 40% of the amount owed.

If the IRS has any hunch that you are not reporting an offshore account, you’re in serious trouble. “The safety people thought they may have had offshore isn’t so safe anymore,” said Blank Rome’s Comisky. “It’s time to come in from the cold.”

You guess on investments

Before this year, brokers were only required to provide the IRS with the date you sold a stock and how much money you earned from that investment.

The IRS had to rely on taxpayers to correctly list the date they bought a stock and how much they paid on their Schedule D capital gains and losses statement.

So if you put down the wrong date or purchase price — whether innocently or on purpose — you could end up paying less tax.

But now, the IRS is getting this additional data straight from brokers. If the information on your return doesn’t match, you’re in trouble. Be sure to locate your exact buy dates and prices, advised Georgetown’s Cooke. Otherwise the IRS will quickly scoop you up for an audit.

NEW YORK (CNNMoney) — The dreaded process of getting an audit could soon take place over a computer screen in the comfort of your living room.

In what could be an indication of things to come, the IRS launched a pilot program at the end of last year that allows taxpayers to use two-way video conferencing for assistance with tax questions and problems.

The Taxpayer Advocate Service, an independent watchdog arm of the IRS, is already calling for the agency to expand to virtual audits. The IRS says it needs to evaluate the success of the pilot program before making a decision.

The pilot program is currently being tested in 12 locations, where taxpayers needing assistance can log into a computer enabled with video-conferencing. They can then talk to an IRS agent who pops up on the screen to discuss whatever issues they’re having — whether it’s help preparing a tax form or a question about a refund.

TAS is also piloting a virtual assistance program. And Nina Olson, the head of TAS, wrote in a blog post this week that this technology has the potential to “radically transform” the current audit process — eventually allowing taxpayers to use their personal computers to video conference with an IRS examiner.

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To schedule an audit, the IRS would send a taxpayer a sign-in code so they could then log in to the meeting from a home or office computer. Documents could be transmitted by simply scanning them with a computer’s built-in camera.

This could one day replace the need for correspondence audits, which are the letters the IRS currently sends taxpayers in the mail asking questions or requesting more information.

requesting more information.

To save costs, the IRS has become increasingly reliant on correspondence audits instead of summoning taxpayers for in-person meetings. But TAS says that these audits receive fewer responses and that many of the taxpayers dealt with these audits don’t understand how they work, default on payments and get hit with penalties.

Plus, with correspondence audits a specific representative typically isn’t assigned to a case, leaving many taxpayers without a point person to ask questions or to contact with concerns.

Virtual audits could eliminate the confusing paperwork and recreate a face-to-face meeting via computer.

Doing this would also help taxpayers better understand why they are being audited and what additional information is needed, said Olson. It would also help the IRS obtain the accurate information it needs and help the agency view taxpayers as more than just tax returns, she said.

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The IRS’s virtual assistance pilot program is scheduled to continue through the 2012 filing season and end in May. Office locations include Colorado Springs, Colo., Fresno, Calif. and Utica, N.Y.

Once the program is completed, the IRS will evaluate its performance. So far, it said the pilot has allowed it “to maximize our current resources, by expanding hours of service in remote locations and balancing the workload in high-traffic areas.” But it wouldn’t say whether it is considering using this same technology for audits.

“The initial focus of virtual delivery is on taxpayer service. We’re still in the middle of the pilot and still assessing the results,” the IRS said in a statement. “It’s premature to speculate about future steps.”