Tuesday, June 10, 2008

Why You Should Not Fear an IRS Audit

Other than a traffic ticket, the most common fear in America is the dreaded IRS tax audit. It brings to mind the threat of harassment, penalties or even jail time. Do not fear though, only 2% of all tax returns are ever audited at all. And what if the IRS audits you? Keep your cool and relax because an audit is simply the IRS's way of requesting more information about your tax return. It is not an accusation of any wrongdoing.

Even though a small percentage of taxpayers are audited each year, it is estimated that every one of us will be audited at some point in our lives. This is because the IRS uses random audits along with categorically targeted audits to achieve compliance with the tax laws.

You should always be prepared for an audit by the IRS. You must be able to produce the supporting documents that prove your deduction was legitimate. This is done by good record keeping. Make sure that you have on file somewhere the original documents that support your claim. And never take any deductions on your tax form that you know are incorrect or you aren't sure about, when in doubt talk to a tax professional.

Here are two ways to minimize your chance of being audited by the IRS:

1. You will decrease the chances of being audited if you sign your own return. The only exception to this is if you are a high paid professional such as a doctor, lawyer, or accountant. It seems that the IRS is wary of people who make a lot of money preparing and signing their own returns.

2. If you file your tax return after April 1, you are less likely to receive a categorical random audit by the IRS. This is because the IRS computers select a certain number of returns at random for categorical audits until the programmed quota is met. Then the IRS computer stops requesting random audits for that category. This strategy will decrease your odds of an audit substantially.

Some people are called into an audit anyway. It is important that you relax and remember that the IRS wants to confirm the accuracy and completeness of your filed return. You are not being accused of anything. They just are requesting more information.

In the event of an audit, you have the right to:

1. Take your tax preparer with you to help clarify your position. This helps because the tax preparer speaks the auditor's language.

2. You can request a more convenient time for the meeting with the IRS. The law stipulates that the time of the audit meeting must be convenient for both parties.

3. If you are not satisfied with the auditor's determination, you can and should appeal to an IRS supervisor. The supervisor is trained in public relations and can help resolve the issue in your favor many times.

Above all don't make the audit more than it really is. It is a normal function of the IRS's business. Remember that the best defense against an audit is to avoid one in the first place. If you keep your records in good order, you should have nothing to worry about even if an audit is requested.

Friday, May 30, 2008

Get All Your Home Business Tax Deductions

In any home business you definitely have more tax advantages than if you were self-employed. The tax advantages become substantial when you consider how you can improve the profitability of your home business by declaring all of the deductions you are entitled to.

You may be missing some very important deductions. You must itemize your deductions for your home business operation on a separate schedule just as you would for your personal deductions. Knowing which deductions you are entitled to can save your home business hundreds of dollars a year.

Here is some background information on how your income tax amount is arrived at by the IRS.

The U.S. taxation code states that almost all income is subject to federal income tax. The way that you, as the owner of your home business, arrive at the final amount of income tax is as follows:

Gross Income - (All Expenses + Miscellaneous Deductions + Depreciation on Assets) = Taxable Income.

Taxable Income X (Your Tax Rate) = Income tax for the fiscal year.

Here is a quick definition of the terms in the above taxation equation:

Gross Income = The total of all income for the year after the cost of the inventory has been paid for.

Expenses = All costs of doing business during the fiscal tax year. Examples include payroll, materials, supplies and interest on business loans, etc. To find out if an expense qualifies as a legitimate business expense, consult your accountant or the IRS.

Depreciation = This is the way of spreading out the deductibility of an asset over a period of more than one year.

The IRS has certain different depreciation schedules for different business property. This is done for assets like real estate, equipment and other assets with a long economic life. This method of taxation write-off has certain advantages. Be sure to talk to your accountant regarding proper depreciation rules. These rules are subject to change by the Congress and the IRS.

Miscellaneous Deductions:

This is an often misunderstood and overlooked way to save a lot of money on taxes. Remember that these types of expenses must be totaled up and declared on a separate schedule of your income tax forms.

Always track your expenses and be sure to save at least one copy of every deduction. You will be asked for proof of every transaction that is declared as a deduction if you are audited by the IRS!

Here is a list of some of the things you can deduct from your income taxes:

Business related expenses include:

1. Air fares
2. Auto expenses
3. Books and Magazines
4. Educational Expenses
5. Home Office Space* + a portion of utilities, telephone, and maintenance costs
6. Office Furniture
7. Cleaning Expenses
8. Meals with Business Clients
9. Laundry Expenses (When Traveling)
10. Advertising
11. Impairment-related Expenses
12. Licenses and Regulatory Fees

* If you own your home you must use the IRS depreciation rules to determine this deduction. If you rent you may also deduct a portion of your rent.

Check IRS Publication 535 to find out if you can deduct any or all of the above.

As you can see there are many deductions that are allowable for your home business. The best way to get more information on tax deductions and related information on income taxes is to go online to www.irs.gov. There you will find a helpful search engine containing thousands of government publications that you can research and print out if you need to.

Now you have a good idea of the deductions you are entitled to take. So do your research, keep track of your expenses and take all of the deductions you can for maximum profit every year.