Coming into the good graces of the IRS should not be confined to a once-a-year approach. This relationship should be nurtured throughout the year. Tax filing should not be such a stressful process if done correctly. The feeling of overwhelm comes into play when one realizes the deadline limits, as well as all the paperwork that is required to make the whole process run smoothly. If one takes the time to familiarize oneself with all the basic requirements, it takes a lot of fear out of everything.
Understanding the dynamics of the IRS
The IRS, or Internal Revenue Service, is a US-based government agency whose main aim is to enforce tax laws and to collect federal taxes. Tax returns are detailed reports that are sent to the IRS. These indicate expenses, income, and other relevant financial information applicable to that specific tax year. Some basic steps can simplify the situation. Determining your filing status is a start.
Calculating the taxable income would also be a smart idea. Another important one would be to confirm whether there are any deductions or credits due. Verifying tax liability should not be thrown by the wayside. And then, the all-important one – don’t forget to file the tax return. Skimping out on these or getting the information wrong when doing taxes can put you in the hot seat.
Becoming familiar with the wrong side of the taxman
Filing tax returns is a stressful process to begin with. Being selected for an audit thereafter may see many a good man heading for the hills in fear. Fewer than 1% of individual tax returns filed are selected for an audit. On the other hand, most of the W-2 earners also do not have much on their tax returns that would qualify for an audit. Being forever vigilant on the subject, red flags may send your tax return to the audit pile:
- Charitable contributions should be claimed sensibly on a tax return. When claiming tax deductions, always ensure that this matches your income. Trying to warrant a donation of more than half your income may trigger a warning.
- Mistakes do happen, but be wary when filing amended tax returns. These tend to raise a bit of an eyebrow on the side of the IRS. More so when there is a big decrease in the reported taxes. These are usually double-checked.
- Be cautious when you are self-employed. Not everything in this scenario is tax-deductible. Make sure to claim only deductions for actual business expenses. It is also crucial to keep documentary proof thereof, as this may be required.
- Try not to guess too much when doing taxes. Especially with expense categories. Overuse of the same expense category on a return may set off the alarm bells.
Using a bit of common sense
Taking the tax return and completing it with the use of a bit of common sense can ease things up a bit. But if an audit is still selected, it is best just to keep a cool head about it. A lot of the returns selected are for correspondence audits. Notification thereof will be distributed to the individual via mail. When a CP2000 IRS notice is issued, it is indicative of an adjustment on payments, income, deductions, or credits.
Documentary proof can be submitted in answer to the queries. Documentary proof is to be kept for no less than three years after the filing date of the specific return. Double-checking a tax return before finally submitting it can also help to identify unnecessary mistakes that have crept in. This can be things such as putting a decimal in the wrong place. Another crucial mistake that people tend to make is to mix business with pleasure, especially when people are self-employed. In these matters, keep personal expenses separate.