Archive for the ‘Taxes’ Category

If you’re juggling work and family obligations and trying to get out of debt to boot, the last thing you need is a nastygram from Uncle Sam telling you that you have been selected for an I.R.S. audit. It’s a huge time sink and if things don’t go your way you may end up with an unexpected tax bill, not to mention new penalties and fees.

With a near-record deficit and lowered tax revenues as a result of the recession, the governement is looking to increase tax receipts through more aggressive enforcement.  The Treasury Department is looking to close the so-called ”tax gap” which is estimated to be approximately $350 billion. What this means, plain and simple, is more Americans staring down the barrel of I.R.S. audits.

Worse yet, for several years now we’ve been seeing the Feds auditing the middle class more often than before.

Avoiding an audit has always been a game of pluck and luck, and it’s difficult to know what the red flags are that can trigger a government computer spitting out your name. The biggest challenge is understanding how these factors can change from year to year.

CNN has a helpful guide to what may now get you flagged for a closer inspection of your 1040′s, W2′s and X16′s. (OK, I made that last one up.)

The things that you need to worry aboiut before hitting “send” on your e-file are as follows:

1. Taking lots of deductions as a self-employed individual. The I.R.S. is very concerned about folks writing off meals, trips and other expenses in support of a “business” that isn’t much more than a hobby and has little chance of turning a profit. You’ll need to keep meticulous records (always a good idea) to show all income and expenses related to running a business of your own.
2. Having a foreign bank account. If you’re required to file a U.S. tax return, you must report foreign bank deposits that exceed $10,000 at any point during the year on form 90-22.1. Overseas banks are cooperating with the U.S. government and you don’t want to get busted on this one.
3. Not calculating the cost basis of stocks correctly. With the market on the upswing and so many people in need of extra cash, a lot of returns will show stock sales in 2009. Read your brokerage statements carefully so that you are shoiwng the true profit/loss on your taxes.
4. Keeping charitable contribution records. Whether cash or non-cash donations, you want to be able to show receipts for all your kind givign.
5. Making a lot of money. High earns have always been a target for audits, and that hasn’t changed. If you make over a million dollars a year then a) you probably don’t need to be reading Debtbeat and b) you’ll want to engage a professional to assist with tax preparation. Because at your income level, mistakes can be very costly indeed.

And speaking of “professional” tax preparers… A lot of people hang shingles over their doors to make money during tax season. Don’t entrust your taxes to just anyone. And it’s always worthwhile to get a second opinion if you have a complext tax situation. Even the national tax preparation outfits have seasonal workers who may know less than you do.

Want to learn more about the audit process? Get info straight from the horse’s mouth at IRS.gov.

With unemployment at a near-record high and greater stress on social services, local governments are increasingly dependent on their property tax base to make ends meet. (Actually making ends meet would be great, many are just looking to stay just a few tens of millions in the red.) These pressures, combined with historical home valuations that no longer reflect market reality, are leaving homeowners with massive tax bills despite having lost much of the value of their homes.

So what do you do when you find yourself looking at an inflated property tax bill caused by a bad assessment?

According to research by Deutsche Bank, homes in the United States are on track to lose nearly a third of their total value from their all-time highs in 2006.  They value the U.S. housing market at $24 trillion in the second quarter of that year but into the second half of last year price depreciation had wiped out about $5.7 trillion in housing wealth and they suspect that the market hasn’t hit bottom yet.

The states hardest hit were California ($2.58 trillion lost), Florida ($815 billion down), Arizona ($325 evaporated) and Nevada ($179 billion in the hole) which lost 66% of housing wealth.

Consumer Reports has a great article on appealing your tax assessment. Rule number one is to make sure that you file your appeal before the deadline (there usually is one, so don’t ignore those notices that come in the mail from your city or county.) You’re also going to want to be armed with good information on the true value of your home. A professional appraisal is best, but real estate web sites like HotPads.com can show you what similar homes in your area are going for. Your county sales records will also give a clue based on recent home sales.

This was also a recent topic of conversation in a Wall Street Journal Q&A that’s worth your while to review.

The National Taxpayer’s Union offers a $6.95 book called How to Fight Property Taxes. They say that their orders have tripled since January 2009.

It’s important to remember that the assessed value of your property is only half the battle. Your local government may keep your assessed value low but raise your tax rate. So it’s critical that you follow the local legislation to ensure that you don’t get a nasty surprise in your next monthly mortgage statement. If your tax rates are going up then you have even more cause to fight a bad assessment. And fight the bad pols who want to squeeze you during these tough times.

April 15th will be here sooner than you think and for a lot of people crunching the numbers on their 1040 forms the bottom line won’t be pretty. They’ll see that they owe money on their taxes and many won’t have a clue how they are going to pay.

As you might imagine, not having the cash to pay the Feds is a very big concern at a time when so many people are out of work, have drawn down their savings or have robbed their retirement accounts blind (causing an even greater tax bill if it’s a premature withdrawal.)

If you find yourself in this situation, don’t panic. Know what you’re facing and take action, because the worst thing that you can do is nothing. The government has near unlimited authority to make your life miserable. They can garnish your wages, put liens on your property and even throw you in jail.

Did I actually say “don’t panic?”

Rule Number One: still file your return, even if you can’t send a check along with it. Not filing a timely return is a federal offense, and you don’t want to go the Wesley Snipes route. But filing without payment doesn’t get you totally off the hook. Receiving your return without the cash owed will start the penalty train moving down the tracks.

The penalty failing to pay on time is .5% for each month (or part of a month) that the payment is late.  The maximum penalty is 25%.

Filing late is much worse. The failure-to-file penalty (or the delinquency penalty as it’s also known) is assessed at a rate of 5% per month with a typical maximum of 25%. That’s ten times as much for those keeping score at home.

If you obtain an extension for your filing due date, you are not filing late unless you miss the extended due date.

For more information on income tax penalties check out http://www.irs.gov/taxtopics/tc653.html.

So where does that leave you when you still have an outstanding bill with Uncle Sam? Here are some of your options:

• Tap into Your Home Equity. If you have sufficient credit on a home equity line, this is a great way to pay taxes owed. You’ll typically have a low interest rate and the interest you pay will generally be tax deductible for the coming tax year. Win win.
• Pay by Credit Card. Not ideal for people looking to get out of debt, I know, but if you have a low interest rate and a plan to pay it off, this is an easy out. You’ll have no I.R.S. penalties, you’ll get the monkey off your back and might even pick up some rewards points. The I.R.S. has information about doing this and a table of their fees for doing this on their website at http://www.irs.gov/efile/article/0,,id=101316,00.html.
• Ask for a Loan from Family/Friends. Everyone knows that the Treasury Department is not to be trifled with and you’d be surprised how willing folks can be to help you get out from under the boot of big government.
• Borrow from your 401(k) or IRA. This is a last-ditch solution but if you will have the money to pay your taxes soon you can typically borrow against your retirement account as long as you repay it within 60 days. But if you can’t, the taxes and penalties will be as bad as paying last year’s taxes late.
• Make Some Money Fast. If your tax bill is small and you’ve got a few weeks still, check out the Earn More section of Debtbeat to find ways to earn a little extra cash ASAP.

When all other sources of funding fail, pick up the phone and call the I.R.S. They want to get their money and are tasked with helping you meet that end.

They can work out an installment plan for you and if your circumstances are dire enough, even negotiate a lowered settlement. You will still have penalties and interest, but at least you won’t have the Feds after you like Mafia loan sharks looking to collect their vig.

There’s been a lot said lately about poor service and long wait times when trying to reach the I.R.S. and there’s a lot of truth behind that.

However, the government recognizes that this is a problem and as a result has proposed more than $43 million in the new  budget to improve IRS customer service. So while the concern of not getting through to someone who can help is legitimate, more than anything else it’s fear and embarrassment that prevent a lot of people from making that call, and it costs them big time.