Monday, March 14, 2011

Questions for the Tax Lady: March 14th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I am a self employed architect and have not received 1099s from several clients. How should I report this income?

Answer: Great question! Too many people think that just because they didn’t receive a 1099, they don’t have to report the income. WRONG. You still have to report all income, the 1099 is simply an informational form provided by the payer. So, this is where keeping good records will save you from a world of hassle. Use your own bank records and deposited checks to determine the amount of income, and report it on your 1040 Schedule C.

Now, what happens if you receive a 1099 and you’ve already filed? First, pull out a copy of your return; see if the amounts are different from what you claimed. If the amounts are different, you should file an amended return (Form 1040X) as soon as possible. If the amounts are not different from what is shown on your tax return, then file that 1099 away, and relax.

Question: Roni, what are some of the biggest IRS audit red flags?

Answer: The IRS uses a lot of different criteria to determine who will be audited. Honestly, I think too much emphasis is placed on the concept of red flags. If you are entitled to a deduction or credit, you should claim it. If you keep proper documentation, you really should have nothing to fear, even in the face of an audit.

Now, that being said, you should be aware of items that are under close IRS scrutiny. Here are just a few things that the IRS keeps a close eye on:

  • First Time Home Buyers credit – If you claimed this tax credit, you can be sure the IRS will be going through your return with a fine-toothed comb.
  • Earned Income Tax Credit – This credit is one of the most under claimed and abused at the same time. That abuse means that anyone claiming the EITC should be ready to verify their tax information, should the IRS ask.
  • Self Employment income – yes, the IRS loves to audit entrepreneurs and small business owners. This group has historically had trouble properly reporting income and over claiming expenses. Now, we all bear the burden of intense IRS scrutiny.
  • Claiming higher than the norm in tax breaks – the IRS has a lot of information about how much most people claim in deductions and credits based on income levels. So, if your amounts are higher than the norm, they will likely be asking to see your receipts.
  • Big incomes – people earning more than six figures have an increased likelihood of audits. Big incomes allow people more resources to hide assets. (not that all rich people are tax evaders. Far from it. But, remember the UBS scandal?) So the IRS takes a special interest in wealthy folks’ taxes.

Remember, you should never let fear of an audit keep you from claiming your rightful tax breaks. There is nothing you can do to prevent an audit, and even avoiding heavily scrutinized tax items will not inoculate you. Just be honest in your IRS dealings, keep immaculate records, and when in doubt, ask for a second opinion on your taxes.

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