Thursday, February 28, 2008

10 Ways to Avoid Back Taxes this Tax Season

Follow these 10 simple steps to make sure you do not owe IRS back taxes after you file your tax returns this tax season.

1. Claim the right filing status

Make sure that you claim the correct filing status. Do not claim something different in order to get a bigger refund such as claiming "Head of Household" when you really should file as "Single". Alternatively, if you are married you should consider filing jointly to lower your total liability.

2. Make sure your math is correct

Always triple check the math in your income tax returns, even if you have them professionally prepared. For the most part the IRS will fix all simple math errors, but problems can arise if you have the wrong numbers listed for income or deductions that lead to an artificially inflated refund.

3. Include income from ALL sources

Make sure that you include income from all sources on your tax return. This includes regular wages, self-employment earnings, tips, independent contract work, child support, alimony, etc. Trying to hide income from the IRS is a big mistake as they have access to mass amounts of information and can determine your exact earnings for each year.

4. Remember winnings from gambling

All the money you win from gambling must be treated as income. However, you can deduct any money you lost at gambling from your total. For more information on taxes and gambling, check out “How to Accurately Reporting Gambling Profits & Losses To The IRS” on the RDTC Tax Help Blog.

5. Do not over exaggerate charitable contributions

In recent years, the IRS has been cracking down on taxpayers that abuse the charitable contribution deductions. Make sure that you only claim contributions that you can document with some type of proof. Also, do not over inflate the donation amount as excessive donations send a huge red flag to the IRS’s audit department.

6. Mail to the correct address, or e-file

Before popping your tax return in the mailbox, make sure that you are sending it to the correct address. If you mail your return to the wrong address it can get lost and result in unnecessary IRS fees or penalties. Fortunately you can avoid this potential problem completely by e-filing your return.

7. File on time, or request an extension

It is essential that you file your tax return on time or at least request an extension from the IRS. If you just ignore tax day then you will be unhappy when you realize what it will cost you. If you cannot file on time, visit “Need More Time to File?” on

8. Forgetting to pay taxes on time

If you do owe money to the IRS then you must pay it before the April 15 deadline. Not paying does not mean your debt will magically go away. Instead it will begin accruing fees and penalties. To pay your taxes enclose a check with your tax return and write your Social Security number, tax form number and tax year on it.

9. If you notice any errors, re-file immediately!

If you notice an error on your tax return, you should file an amended return as soon as possible. If you wait for the IRS to catch your error then you will likely be faced with fees and penalties in addition to the owed back taxes.

10. Make immediate adjustments to withholding or estimated tax payments

Okay, okay, I will admit, this has more to do with 2008 than this year. However, after preparing, filing, and paying your 2007 federal income taxes, you need to take the information from the return and put it to immediate use. If you ended-up owing taxes, you need to adjust your withholdings and/or start making larger estimated tax payments. If you end-up with a very large refund, again, you may need to adjust your withholdings or estimated tax payments. That way you will receive that refund immediately in your regular paychecks. You could then take that money and put it to good use in wise investments or replenish your savings.

Also, if you do owe for 2007 and will need to work with the IRS at resolving your IRS tax debt (instead of paying in one lump sum), you will be required to make adjustments to your withholding and/or estimated tax payments. That is because the IRS is unwilling to work with taxpayers until they have taken steps to ensure that they will not owe again in the future. Higher withholding taxes and/or estimated tax payments are also allowable expenses, which is important in qualifying for some forms of IRS tax debt resolution (i.e. Offer in Compromise, Installment Agreements, Currently Not Collectible status, etc.).

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