Five Myths About Tax Audits That You Should Forget Immediately

Getting a letter in the mail from the Internal Revenue Service is never a good day for anybody. After all, this is an organization that is set up specifically to take money from you.

However, there are many myths about tax audits that are created out of thin air, most of which encourage more fear than is truly necessary.

Myth: All tax audits are a matter of life and death

The truth about most tax audits is that they are a discrepancy of records. In many cases, the IRS is simply stating that its records do not show the same thing that you reported on your tax forms.

If it is a case of a mistake on their side, you send in the information, and you never even have to come in to see an agent.

Myth: 10% or more of people are audited in any given year

The truth is that less than 1% of people in any given year are audited. The IRS does not keep a tally on the percentage of people that it audits in any given year.

If there are more people who do not keep appropriate records, the more people will be audited that year. If there are less people that do this, then less people will be audited.

There is no such thing as an “audit quota.”

Myth: Having a professional file your taxes for you makes you completely audit proof

The truth of the matter is that you are responsible for all records that have your name on them no matter who files them.

Your professional filer may offer some sort of insurance for help with your representation if you get audited, but the final responsibility falls on you to correct any discrepancies in the records between you and the IRS.

Myth: If you keep your income below at certain threshold, you will not get audited

The IRS has been hiring more people to conduct more audits because of the discrepancy that it is found with records in the past.

However, many people believe that most of these agents are looking for people above a certain income threshold. This is not the case.

Additional audits are being conducted across the board, and just because you do not burn above a certain arbitrary threshold does not mean that you cannot be audited by the IRS.

Myth: If you file for certain deductions, you stand a better chance of being audited

Many people do not take deductions to which they are absolutely entitled because they believe that taking them will raise some sort of “red flag” with the IRS.

The truth is that any deduction that is in conjunction with the law is a deduction that you should take. IRS agents do not determine an audit simply based on the name of a certain deduction.

If you understand the true nature of what IRS audits are meant to do, you will realize that they are nothing to be scared of. Make sure that you keep all of your records as thorough as possible and report according to the law as closely as you can.

If this is your method of filing taxes with the IRS, then you will certainly be able to handle any queries that they may have about your records even if you do get audited at some point in the future.

Photo: James Morris / CC 2.0

Five Tax Myths That No One Should Ever Believe

February is here. And with tax season in full swing, you have probably started to hear those annual rumors about what’s acceptable and unacceptable when it comes to filing your taxes.

Around this time of the year, you can run into a lot of bad advice, so here’s a list of some of the most common tax myths that you should avoid:

Myth #1: Filing Taxes is Voluntary

Although this myth may seem counterintuitive, it’s surprising how many people are actually under the impression that filing taxes is completely voluntary because Form 1040 in the instruction book describes the tax system as “voluntary”.

However, Uncle Sam requires everyone to file taxes, even if you haven’t had any income all year.

Myth #2: Animals can Be Claimed as Dependents

Many people are under the impression that anything that’s alive and in your care can be claimed as a dependent, but that’s not the case.

No matter how you love your pet, you aren’t allowed to claim them as dependents.

And while it may be true that pets receive more than half of their financial support from their owners, they’re still not human, and you still can’t file taxes on an animal.

Myth #3: Illegal Activity is Not Taxable

Although it may not make much sense, criminal activity is taxable.

Regardless of whether you are a bank robber, drug dealer or con artist, the government still wants their cut of your income.

No matter how good you are at hiding your illicit activities, the government will eventually find out about it, and tax you on it. Al Capone is a prime example.

Myth #4: Money Made On the Internet is Tax Free

Since many people doing business online don’t report taxes for their income made online, it’s not hard to see how this rumor got started.

However, regardless of whether you generate money online or at a traditional job, the IRS still requires you to declare that income if it’s over 400 dollars per year.

Myth #5: I Don’t Make Enough Money to be Audited

The amount of money you make doesn’t have as much to do with being audited than you may think. There are many more factors that could possibly send up red flags when it comes to a tax audit.

And while it’s true that individuals who make more than 100,000 dollars per year get audited about twice as much as those who make less than that, those who make under 100,000 dollars per year still have a one percent chance of being audited, which is the national average.

To stay safe, it’s best to save any relevant receipts of anything that could be considered questionable income for three years.

Finding A Tax Professional To Get You Through Tax Season

It’s a new year, and that means it’s tax season once again.

Between now and the magic date of April 15, millions of Americans undergo the annual ritual of gathering documents, saving receipts, filling out forms, navigating the ever-changing rules and, hopefully, ending up with a refund.

If this adventure leaves you scrambling for help, you’re not alone. According to IRS figures, over half of all taxpayers in 2014 paid someone to do their returns, while another one-third used tax software.

Unless your taxes are quite simple or you have great numerical and research skills, the tax code is simply too complicated to tackle once per year. This has led to the growth of a massive tax-preparation industry over the past six decades, since the IRS stopped preparing returns for free in the mid-1950s.

Where To Start

This is a major purchase with long-term consequences. Start by asking around. Work is a good place to start, since many of your co-workers may have similar tax situations.

The Yellow Pages has an entire section filled with practitioners that compete for your business. Interviewing a few of them will give you an idea of their competence, fees and service level.

Several national tax preparation companies serve millions of taxpayers, including H&R Block, Jackson Hewitt, Liberty Tax and others. These companies hire mostly seasonal preparers and train them every year on the latest rules and software. All have both new and experienced preparers to choose from. When contacting them, look for a preparer with the experience that fits your situation.

Accounting and CPA firms are often open year-round and may provide a range of services, including payroll, bookkeeping, auditing and more. Taxes may or may not be one of their specialties, so prospective clients should ask specifically about their tax practice.

Higher Level Help

Several professional designations are used in the tax industry.

An Enrolled Agent is most desirable. This is a person who has passed a difficult exam and is qualified to practice before the IRS.

A Tax Attorney is a licensed, practicing attorney specializing in tax law.

These two professionals may represent taxpayers with the IRS in case of an audit. They are best hired for handling unusual or complex tax situations and are not typically needed for everyday tax returns.

What To Expect

Any competent tax preparer will ask about your personal situation, including marital status, dependents, work, school, home ownership and many other factors covered in the tax code.

Since this is sensitive personal information, taxpayers should look for a preparer with whom they feel confident and have rapport.

Many tax preparers and offices are available only from January through April. A reputable preparer offers tax help throughout the year, either personally or through their firm.

Do Your Homework

Like other occasional purchases, we choose tax services to take care of an essential need in our life.

It is critical to understand that no matter who prepares the return, the taxpayer is ultimately responsible for the results.

Look carefully, ask questions and pick the professional that best fits your needs.

Photo: John Morgan / CC 2.0

3 Financial New Year Resolutions You Should Make This Year as a Small Business Owner

As you know, running a small business requires you to wear multiple hats. Many small business owners do not have the time to be on top of their finances as much as they should.

And it’s easy to understand why. There’s a lot to handle from making sure you’re deducting your expenses correctly, taking care of payroll, to ensuring your accounting is organized for tax season.

But here are some important resolutions you should make this New Year if you want a significant improvement in your wallet.

I Resolve to Take Control of My Business Cash Flow

Your cash flow controls the flow of your business, so delays can quickly halt the progress of your business.

If you’re dealing with cash flow problems due to the way you are accepting payments, you may have to come up with an alternative that works with your customers or clients.

If you’re spending too much on inventory at once and can’t come up with a decent budget for marketing, it’s a good idea to try to restock twice rather than all at once.

The point here is that you need to manage your cash flow to ensure that your business runs smoothly and isn’t at risk of taking a financial hit. Cash flow will be vital for paying your employees on time, having a budget for marketing, and paying for inventory, so even the slightest of delays can hurt your business.

I Resolve to Make the Best of My Inventory

If your business is based on physical goods, then it’s time to take a serious look at your inventory this year. You want to really go through your inventory to see which products are costing you money, which products to order less of on the next run, and which products you need to order more of.

Evaluating inventory has always been one of the best ways for small businesses to save money, but it is also a good way to spot opportunities.

For example, a product that you didn’t think much of may be popular with customers or a product that’s not seeing much volume might have a high profit margin and may be worth marketing to customers.

I Resolve to See My Business Tax Professional Early

Working with a tax professional that specializes in business tax can translate into a significant amount of savings for your business.

You’ll be able to get information on what you can deduct, avoid tax violations that can get you into trouble, prevent your business from being audited, and learn various ways to save even more money.

But it’s very important that you consult with a business tax professional far earlier than when your taxes are due. This will give you the time to run your numbers back to back for accuracy, better organize your tax records, and ensure that all your deductions are accounted for.

Those are just some of the finance resolutions you should make for your small business this New Year. It sounds simple enough, but each of the three on the list does require a respectable amount of your time.

So rather than trying to spread yourself thin trying to put all three into place, start with one until you feel that you’ve gotten that aspect of your small business finances in order.

Once you see some success, you’ll quickly gain the motivation to put the other two financial resolutions into action.

Photo: 401(K) 2012 / CC 2.0

Three Resources For Getting Your Finances Under Control In 2015

Improving your grasp on personal financial is one of the most powerful things you can do for yourself at any age. Sound financial management frees more of your time and energy for improving your life in all areas.

Get started with the best personal financial resources to make your life easier. Whether you need to get out of debt or track your growing income, there’s a program, app or free information just a click away.

Mint

Mint ranks as one of the top finance programs for several reasons.

It’s relatively easy to use, even if you’ve never tried any kind of budgeting software. It autopopulates your account information, meaning you don’t have to make individual entries.

For anyone who has been using a spreadsheet online or keeping accounts offline in multiple registers or logs, Mint offers a major time savings. Its full suite of features mean you can trade in multiple ways of tracking and managing your money for one solution.

Mint puts all your accounts in one place, simplifying the process of tracking and managing your money. With this all-in-one budgeting tool you have the power to set bill reminders, watch your spending and keep tabs on your credit cards, checking and savings balances from one program.

This makes it an outstanding tool for people who need more organization and streamlining in their financial lives.

You Need A Budget

YNAB sets itself apart by offering training to go along with its budgeting software.

The principle behind the program is a sound one: it trains you to live on last month’s income. If you have difficulty meeting expenses month to month, are in debt, or see the prospect of debt looming, working with this program could solve your problems.

With its training modules, you get ongoing help with difficulties so you can get your money on track. It’s easy to make adjustments in the budget, so it adapts with you when spending or income changes.

The membership for YNAB costs $60. A free, no obligation trial period allows you to try out the software, receive training emails and have access to the website to see how it suits your needs.

For anyone in debt or who needs to get a better grasp of money management, YNAB is a refreshing option. The layout is simple enough to give you the big picture on where you stand at a glance, yet offers customization so you can create categories that fit your life.

With YNAB you learn to assess your financial standing before making decisions such as opting for a major expense or cutting back on spending categories that may be out of balance with your income.

More than budgeting software, YNAB offers a money management boot camp to help people make better financial decisions.

Kiplinger.com

Kiplinger’s stands out with authoritative information on key personal finance topics.

In addition to detailed articles that will improve your grasp of personal finance, you’ll learn about the larger world of money and how to make your money work for you. Here you can find advice and calculators for investment and retirement, and a handy link to FederalReserve.org.

The government’s financial education site covers key areas of personal finance.

From choosing a financial institution to managing a business, help yourself to free advise from the U.S. Federal Reserve.

Three Simple Financial Skills To Learn In 2015

Did you read our blog post on personal finance New Years resolutions, think “But these are haaaaaard,” and then just ignore them?

First of all, how dare you?

Second, well fine then! We made a quick list of some even easier financial resolutions you can make,

Balance your checkbook

A lot of people think that balancing your checkbook only refers to keeping track of the checks that you write.

Wrong.

Balancing your checkbook isn’t just about checks; it’s about keeping track of ALL of your financial transactions.

In fact, the most difficult part of keeping this resolution is getting into the habit of writing everything down. The only way for balancing your checkbook to work correctly is if you’re accurately tracking everything.

Then it’s just a simple matter of comparing your ledger against your bank statement. It’s a great way to check for any errors the bank may have made, and helps you keep yourself constantly up to date with your finances.

Learn to calculate a tip in your head

If you don’t know how to calculate a tip in your head, you basically have three options:

1. Have someone else at the table handle it, which puts you at their mercy, so you’re not going to do that.

2. Bust out your phone to use the calculator, which you’re not going to do, because, come on, you’re not gonna do that, which leaves you with just one option:

3. Wing it. Just pick a number that feels right and put it down. Could be too much, could be too little. Don’t know, don’t care.

The thing is, though, calculating the tip in your head is VERY easy. Here’s a breakdown.

The simplest percentage to figure out is 10%. All you have to do is move the decimal point in the price one space to the left. So a 10% tip on a bill of $45.93 comes to $4.59.

And if you want to tip 20%? Just move the decimal over one space and then double the result. Have terrible service? Move the decimal over and cut the result in half. Boom, 5%.

Do your own taxes

Ah, taxes. The annual ritual that all Americans have the shared pleasure of completing before April 15.

Here’s the thing: If you’re someone who has a family, or owns a business, or has some unique financial situation, then, yes, you may want to get a little help with your taxes.

On the other hand, if you’re single and just have your basic 9-5 job, your taxes aren’t going to be that complicated.

You can easily complete them on your own with the help of a free federal filing service like TurboTax, which also has the option to file your state taxes for a small fee.

However, if you feel like doing the whole thing for free, use Turbo Tax for your federal return, and then a government filing service for your state return. A little Googling should help you find your state’s service.

The only issue with doing it that way is that you basically have to input everything twice. It can be a bit of a pain, but that’s more money for you in the end.

Why You Should Never Put Off Doing Your Taxes

Nobody likes to think about doing their taxes. Many people find it an unpleasant experience best dealt with at the last minute. This approach may provide a few months of avoidance pleasure, but could cause problems.

It’s important for people to realize there are benefits to doing your taxes early.

Stress Reduction

Waiting until the last possible moment to file taxes can be stressful. This stress can be avoided by doing taxes early.

All the proper forms can easily be obtained further away from the filing deadline. When done early, there is no shortage of tax forms. People who prepare taxes are not yet stressed by doing last-minute returns for clients.

Doing taxes early provides extra time to review them and detect any problems. If a mistake is found, it can be easily corrected prior to the filing deadline. Doing taxes correctly can avoid a lot of unwanted stress.

Avoid Late Filing Penalties

The penalty for filing taxes late with the IRS is usually 5 percent of the unpaid taxes for each month or portion of a month the tax return is late. This penalty starts and begins to increase the day after tax returns are due. It usually isn’t more than 25 percent of the unpaid taxes. If a person files their return but does not pay their taxes owed by the deadline, they can face a failure-to-pay penalty. This amount to ½ of 1 percent of the unpaid tax balance.

Know Tax Liability

When a person does their taxes early, they may find that they owe the government a certain amount of money. In some cases, a person may need to arrange for payment.

Doing taxes early will enable a person to make the right payment amount. Depending on when they’re done, a person will have the necessary time to prepare to meet their tax obligation.

Receiving Refund Early

The sooner a person files their taxes, the quicker they get their refund. Waiting until the last minute may make a refund not available until summer.

There are many people who file their taxes late. When this is done, the time to process the tax refunds takes more time.

The IRS is usually overwhelmed with processing tax returns by the end of the tax filing season. This means issuing tax refunds take a longer time.

Avoid Identity Theft

Most people don’t realize there is a high rate of identity theft that occurs during the tax refund season. One of the best ways to avoid this problem is to file taxes early. This decreases the opportunity for someone to file a tax return in another person’s name.

When this does happen, the IRS will notify the person who filed their taxes earlier that another return has been filed in their name.

Avoid Post Office Problems

The IRS says that over 70 percent of taxpayers in the United States file their tax returns electronically. This means that approximately 30 percent of tax paying citizens are using the U.S. Post Office to mail their tax returns.

Some people mail their tax returns out of habit, others by design, and some because their circumstances require it. There are taxpayers who mistakenly believe paper tax filing decreases their chances of being audited.

Waiting until the last minute to mail a tax return could lead to a number of unexpected problems such as crowds, traffic, closing times and more.

Avoid Amended Returns

There are times when employers make mistakes. Companies have been known to make mistakes when they report their employee’s wages to the tax authorities.

If a person files their tax return based on incorrect information, they will have to refile an amended return with the correct information. When a tax return is filed early, a mistake like this can also be addressed and corrected early.

Photo: 401(K) 2012 / CC 2.0

Five New Years Resolutions For Improving Your Personal Finance

Our financial lives can always use an overhaul, and what better time than in the new year to refresh what’s become stale and unprofitable?

Rethinking how we manage our finances for a new year is one of those things that is worth our time and exploration. All sorts of good things can come from a personal finance reboot, so to speak.

Review Your Budget

One good way to start to rethink your finances is to take note of how you spend your money.

Learn how to take small financial steps that lead to big gains. Jot down, in a notepad, every penny that you spend on everything from the essentials to entertainment.

Being aware of where your money goes is much like a dieter looking at the scale to assess the weight they are losing. The only difference is that if you make adjustments to your frivolous ways of spending, your money will grow and you have everything to gain from that.

So for the New Year, a strong resolution is: gain money, not weight.

Set Specific Amounts to Save

No matter how dreaded the task may seem, learn to set specific financial goals such as contributing X amount to an emergency fund. This is a practice that pays off in the event of unforeseen expenditures.

Those who start the year setting measurable savings amounts for the coming months tend to repeat this smart practice each year and end up better off financially than those who don’t.

Resolve to set financial goals that are attainable and measurable, so you can protect yourself from financial storms.

Automatically Pay Yourself for Your Future
You can automatically set aside a percentage of your income, and this is a good way to contribute to any savings towards a home or car, retirement, 401(k), or college fund. Make it a habit to pull ten percent of your income out and pay yourself just like you would any bill. With discipline, your financial future may look brighter before you know it. So here’s a resolution: set up an automatic withdrawal from your bank account to an investment account. You will pay yourself automatically, and you probably won’t even notice that the money has left your bank account.

Switch Banks

With the onset of mobile banking and the use of apps, one suggestion is that you switch to a financial institution that provides optimum services and tools for your personal financing. The new year could be a prime time to do so.

If finding a bank that offers online personal financial management (PFM) tools helps you budget wisely and learn how to make your money work better for you, then that could be a New Year’s resolution worth looking into.

Resolve to Make a Resolution

More important than any single financial New Year’s resolution is the commitment to taking charge of your finances. Whatever resolution you make will be better than ignoring your finances altogether.

Once you get in the habit of paying attention to how you use your money, you may find that you actually enjoy managing finances, rather than dreading it. An easy way to get started is to write down three improvements you’d like to see in your finances, such as income, savings, paying bills on time, and so forth. Then think about the specific steps you would have to take to make those things happen.

Before you know it, you’ll be way ahead of the financial game.

At the end of next year, you’ll look back and congratulate yourself for making New Year’s resolutions that are practical and can shape your future.

Check Security: Stronger Than Ever

Today’s checks have a host of security features that make it difficult if not impossible for them to be forged or counterfeited. Security features on checks these range from special ink to special paper to holographic images.

Modern checks are printed on chemically sensitive paper, which causes stains or discoloration when someone tries to alter the check.

Most checks also have coatings on the paper that cause the toner to adhere. If someone attempts to lift the toner with a piece of sticky tape, it will rip the paper, rendering the check unusable.

Checks these days also come with a range of features that are meant to thwart copying and counterfeiting. These include:

Watermarks, which is a distinctive symbol that is visible on the original checks but won’t reproduce on a copy;

Visible fibers, often of varying colors, that are present throughout the check paper and make copying nearly impossible;

Security screen backer, which contains words that will fade or disappear completely on a photocopy or scanned image of the check;

Multi-colored backgrounds, which make the check difficult to copy or reproduce;

Microprinting — microscopic words, viewable only under a magnifying glass, that become pixelated and unreadable on a copy of the check;

Void indication, which is an area on the check backer with the word “void” in it that only appears in a reproduction.

You might think that check makers would want to hide these security features from those who might want to circumvent them, but today’s high-security checks do the exact opposite, using several methods to advertise their security features. These include:

A warning band on the face of the check that announces the security features;

A warning box on the back of the check that lists the security features;

A padlock icon that shows the checks meet industry standards for security features.

Four Personal Finance Myths You Should Un-Learn Right Now

Managing your personal finances may seem easy enough to do, but many individuals struggle with financial issues and concerns. Everything from creating a balanced budget to finding money to save for retirement can boggle your mind and can create stress in your daily life.

More than that, personal finance myths can add to the complexity of your efforts. The fact is that clarifying some of these myths can help you to improve your personal finance efforts and strategies with great results.

You Can Wait Until Later to Save for Retirement

You may not plan to retire until you are 60, 65 or even older, but that does not mean that you should delay your retirement efforts.

The fact is that compounded interest, dividend reinvestments and other factors can work in your favor over time. The sooner you start saving, the more effective these will be in working for you.

Tax Breaks Are Only for Rich People

Many people who are less well-off believe that tax breaks are only for the rich, and because of this, some often fail to look for deductions and credits they may qualify for.

There are actually many rebates and credits that are designed for all economic classes. By learning more about these tax breaks, you can determine which options are available to help you reduce your tax liability each year.

Social Security Will Disappear Before You Retire

Social Security benefits are often mentioned in the news, and it is widely known that the funds available for Social Security payments are decreasing. This is compounded with rising numbers of people reaching retirement age and applying for their benefits.

The fact is, however, that Social Security will not disappear before most people alive today retire. The benefits may not be as significant for future retirees as they are for today’s seniors, but you can still reasonably expect to receive some benefits.

Your Home is a Ticket to Wealth

Many believe that the great American dream of home ownership will instantly lead to personal wealth, and this is simply not the case.

A home can provide you with tax deductions, an affordable place to live and other benefits. It may appreciate in value over the years.

However, it also requires maintenance, repairs and even updating over time. Because of this, the costs of home ownership should be compared with the benefits. Many will enjoy selling their home for a profit at some point in the future, but a home should not typically be a person’s soul source of savings or the only retirement plan.

Personal finance can be confusing and complicated. There are numerous factors to consider as you pay your bills, create a budget and make savings and investment decisions. Myths surrounding personal finance can make it more difficult for you to make informed financial decisions and to prepare for the future.

Through the clarification of some of the more common myths that are circulating about personal finance issues, you can easily make better decisions about your finances.