One of the most common questions asked at tax time is, “How do I avoid being audited?” The question itself is more common than the probability of actually being audited. Only 1% of all taxpayers have actually been audited.

When you know what information on your return will trigger an audit, it will help you to avoid one. It is by no means a guarantee, but it will definitely reduce your chances. By looking at past audits, you will see what common issues you need to take a close look at.

High deductions – Deductions that are unusually high compared to your income sends a red flag to the IRS. They annually publish the “Statistics of Income” and, although the book offers a range for typical income, you have to use common sense here. If you are at the lower spectrum of the income bracket, and you happen to claim high deductions in association with that lower bracket, you might trigger an audit, despite the fact that the deductions may be valid.

High Income – Higher income is usually considered an advantage, but from the IRS’s perspective, it causes them to look a little closer, which can be a disadvantage. Past audits show that a chance for an audit of a taxpayer who makes less than $100,000 is 0.93%, whereas a taxpayer whose income is over $100,000 has a 1.77% chance of being audited. With income over $200,000, your potential for an audit jumps to 2.87% and anyone who makes $1 million will  have a 9.37% chance of being audited.

Cash Income – When you work in a profession where you handle cash, such as receiving tips, it makes the IRS curious. They will most likely compare your bank deposits and the income you have claimed on your taxes. If they don’t add up, you may find yourself being audited.

Self-Employment – Self-employed taxpayers tend to write-off as many expenses they can in order to keep as much of their money as possible. The IRS is sure to verify that these expenses and deductions are legitimate.

But just because some items on a tax return might trigger a red flag with the IRS, it isn’t a guarantee that you will be audited. Your best bet to avoid an audit, though, is to expect that it will happen. Make certain that your deductions are correct and you have a record of every expense and pay stubs to show the IRS, just in case.

Of course, not having to deal with an audit is the best thing that could happen, and if you keep yourself apprised of the issues the IRS looks at, you will avoid that letter from them.

 Daniel Stoica Accounting Professional

The U.S. government knows that when you are financially responsible for a child or other dependent, you may come into financial difficulties, so the IRS allows you to take a tax credit on your income taxes. It will reduce your tax debt if you qualify for the Child Tax Credit.

If you pay someone to care for your child or other dependent while you work, or look for work, you may qualify for this tax credit. The good news is, by claiming this credit, you may even qualify for a bigger tax refund.

What is the child tax credit?

The child tax credit is a tax credit that depends on the number of dependent children in your  family. The credit depends on your income level as well. 

How do I qualify for this tax credit?

To qualify for this credit, your child or dependent must be under the age of 13. You must also pay someone to care for them while you are working or looking for work, but it must not be a spouse or your own child under the age of 19 years old. This caregive must not be your own dependent. An after school program, such as Boys and Girls Club or YMCA may qualify, but you may not claim regular school expenses.

If you care for your spouse, or any dependent who can’t care for themselves, age is not important in this instance. If you care for a disabled parent or mentally or physically challenged child, they qualify for the tax credit if they lived with you for more than six months out of the year. You are allowed to claim as much as 35% of the expenses you incur to care for them, which is $3,000 for one person or $6,000 for two or more people.

If you are employed and file as single, head of household or married filing jointly, you may apply for the child tax credit. If you receive benefits for child care through your employer, these amounts will be calculated on your return.

Why wouldn’t I apply for this credit?

If you qualify for the child tax credit, there is no reason why you shouldn’t claim it. Take advantage of all of the credits and deductions you can. It will reduce your tax burden or give you a bigger refund come tax time and, frankly, with all of the work you do caring for your child or parent or other dependent, you deserve the tax break.

 Daniel Stoica Accounting Professional

Any tax professional will tell you that, no matter how upset you are with an IRS decision, it would be in your best interest to remain friendly and tactful when speaking with an IRS agent over the phone. Stories have been told about how people have been so angry over a pending audit or negative decision by the IRS that they have sabotaged their chances of getting help and leniency. Stay calm and composed and you’re sure to get the most out of your conversation.

There are 10 very useful tips to dealing with the IRS over the phone:

1. You should be aware of the progress of your case and how it’s moving along in the IRS system. You can review how the process works on the IRS website.

2.  Make sure you have your transcript from the IRS ready when you call the office. You will need to be looking at the same records the IRS agent is looking at so they can go over it with you, step-by-step. To order your transcript for free, call 1-800-829-1040.

 3. When you first contact the IRS, you will want to make sure you get the name and ID number of the agent you are speaking to. Make note of the date and time of your call, as well. The agent will give you his or her name and ID number when they answer your call.

4. When you call the IRS office on more than one occasion for the same reason, you will most likely end up talking to a different agent each time. This is normal procedure. The calls are routed to different offices all over the country and they will be available to take calls until 8 p.m. EST.

5. It is not customary for the IRS to call you back. The agents can only take incoming calls and they will never give you their direct numbers. It can be frustrating, but it is how they do things.

6. If you are feeling frustrated, you will still need to deal with the agent you are speaking to because it isn’t likely they will transfer you to a supervisor. The agent will most likely tell you the supervisor can call you back in 2 to 3 days, but it is very rare that they do. Yet another frustrating aspect of dealing with the IRS over the phone.

7. Make sure you have all of your tax forms with you when you call the IRS. You are normally on hold for long periods of time when you call. If you have all of your paperwork in front of you, you will not end up having to call again. 

8. Become familiar with the agent you are speaking with. They have their own style and personality and each of them has their own stress. Their mood will be obvious the moment they answer the phone. If you cannot talk to this particular person, try calling back to get someone else.

9.  If an IRS agent gives you a future date to call them back, be sure to call them back on that date, otherwise the IRS computer will move your case into what is called “enforcement”.

10.  If you don’t get the results or response you are looking for from the IRS agent(s), you can always contact the Taxpayer’s Advocate.

Yes, at times it may be frustrating to deal with the IRS, but if you follow these steps, your dealings with them are more likely to run smoother than if you are not prepared or if you remain frustrated and angry and take it out on the agent.  Or, talk to a tax professional to help you work with the IRS. 

Daniel Stoica Accounting Professional

It may seem unfair that the IRS would go after a Military veteran who was wounded in the line of duty, but the fact of the matter is, people who have served in the Military are still taxpayers. The IRS has the legal right to collect taxes from anyone who has not paid their taxes, including disabled veterans.

What is VA Disability Compensation?

A veteran who is injured in the line of duty qualifies for disability benefits. The amount they are awarded is based on how badly they were injured and the number of dependants they have. The benefits are tax free, but they are not free from IRS garnishment if they owe back taxes. The IRS has the legal right to take up to 15% of their monthly disability benefits.

As with any other public assistance money, veterans rely on these benefits as their source of income. Many of them cannot work, so disability benefits may be their only source of income, and if they are helping to support a family, those checks put a roof over their heads and food on the table. However, that is not the IRS’s concern.

If a veteran owes taxes to the IRS, they will use every legal means to collect. The ironic thing is, they are the once writing those disability checks, so the Treasury Department will just send less money every month. This is known as an IRS levy. Normally, it refers to back account levies or wage garnishments, but it can be done with disability benefits, as well.

Types of wage garnishment

The IRS doesn’t only go after working people, despite the fact that it’s called “wage” garnishment. Any income you receive is considered wages, so the IRS is within its legal right to take disability benefits, as well. The IRS can even issue a levy on Social Security benefits, social security disability and VA compensation disability benefits.

Talk to a tax professional about garnishments

Sadly, there are still millions of Americans who owe back taxes to the IRS. Some of them have simply cheated the IRS, but the majority of them are good, hard working people who simply cannot afford to pay their taxes. And, since disabled veterans generally are unable to work, they have no way to pay the debt. Instead of forgiving the debt, the IRS takes the benefits from the only income they have, their disability checks, and they are legally able to do so.

The good news is that, by law, the IRS can’t take a person’s whole check. Only 30 years ago, this was not the case. Today, however, they must leave you with enough to live on and not enough to put you in financial ruin. There are ways to put the garnishments on hold, but the only way to do that is by contacting an experienced tax professional. Once you have begun to comply with the IRS to repay your back taxes, the garnishments generally stop. Again, a tax professional will help you with each step of the process so you can get free of the garnishment. And don’t believe the ads you see that claim to be able to completely eliminate your tax debt. This very rarely happens. The only way to get rid of the debt completely is with lots of paperwork and lots of proof. Once again, the advice of a tax professional will benefit you if you do choose to take this route.

A tax advisor will help you fix your tax problem and contact the IRS on your behalf. They will work with the IRS to stop the garnishment and reduce the amount you owe. They generally work on a payment plan between you and the IRS that will include monthly payments that are smaller than the amount that is taken from your monthly benefits. And, a tax advisor will also help with completing and submitting un-filed tax returns. 

Daniel Stoica Accounting Professional

The Internal Revenue Service has announced that they are going to increase in the optional standard mileage rates for the last six months of 2011. Now taxpayers can use these rates to figure out the deductible on the of operation of an automobile for business and other purposes.

The rate is going increase to 55.5 cents a mile for all business miles driven between July 1, 2011, and Dec. 31, 2011. This increase is up from the 51 cent rate that was in effect for the first six months of 2011. It is part of Revenue Procedure 2010-51.

The IRS has adjusted the rate for the last six months of 2011 due to the increase in gas prices. They normally update the mileage rates only once a year, in the fall, for the following year.

IRS Commissioner Doug Shulman said, “This year’s higher gas prices are having a serious impact on  Americans. The IRS is adjusting the standard mileage rates to reflect this increase in gas prices.”  The IRS is doing this to help offset the price taxpayers pay at the gas pumps. 

The price of gas plays a major role in this mileage rate adjustment, but there are other factors that caused this adjustment, such as depreciation and insurance, as well as other fixed and variable costs.

The business mileage rate is used to figure the business-related operation cost deductible when used to record actual mileage costs. It is also used to reimburse employees who use company vehicles for business activities.

The rate for medical and moving expenses will also increase to 23.5 cents per mile, which is up from 19 cents for the first six months of 2011. The rate for services for charitable organizations will stay at 14 cents per mile because this rate is set by statute and not the IRS.

The new rates are listed in Announcement 2011-40 on the optional standard mileage rates.

This has always been an optional deduction for taxpayers who use their vehicles for business purposes, rather than using the standard mileage rate.

Here are the mileage rates for 7/1/2011 to 12/31/2011:

Business purposes: 55.5 cents per mile (up from 51 cents per mile for 1/1/2011 to 6/30/2011)

Medical/moving purposes: 23.5 cents per mile (up from 10 cents per mile for 1/1/2011 to 6/30/2011)

Charitable purposes: 14 cents per mile (no change)

These new rates are helpful to anyone who uses their vehicle for business purposes because of the rising gas prices. If you need help figuring your mileage, please consult with a tax professional.

Daniel Stoica Accounting Professional

Only two things are certain in life:  Death and taxes. Why do we pay taxes, though?  Surely there was a time when we didn’t have to pay taxes at all?

We have to take a look at history in order to answer this question. In the earlies days of our history, everyone generally worked for the good of others in their nomadic“tribes”. They basically bartered. Eventually, these tribes settled down and created communities.

A form of government evolved from these communities. Obviously, there have been many different types of governments,  from dictators and monarchies to republics and democracies. All of them have taxed their citizens for one reason or another, usually to run the government, but sometimes for their own benefit.

The concept of taxes for goods and services has changed quite a bit since the beginning. There are now many different taxes for many different things. These different taxes include:

-Real estate taxes – These are imposed by local governments to pay for schools, police and fire services, hospitals, waste management, road maintenance, parks, and libraries.

-Sales taxes – These taxes are taken by any level of government, but usually at the state level. These funds usually help with the state’s budget.

-Income tax – In the U.S., this tax is taken by the IRS and sometimes at the state level. In the U.S., income tax is constantly progressing.

There are also Payroll (FICA), Capital Gains, Corporate, Estate, Gift, and Excise taxes.  We would like to think that taxes benefit everyone equally, but that doesn’t always happen because people pay taxes for government services that some people don’t need or use. For instance, a childless person still pays taxes for a public school’s budget. And all of us are required to pay taxes despite the fact that some of us disagree with being taxed to fund certain policies or services. 

Of course, there are some people who refuse to pay their taxes. They are called “tax protesters”. These people regularly receive notices, audits and liens from the IRS for not paying their taxes.  Some even receive jail time.   

If you are in need of more details on why we are required to pay taxes, you should talk to someone who is not involved with a government entity. Consult with a tax professional for some answers.

Daniel Stoica Accounting Professional

It’s difficult for a sole proprietor to find legitimate tax reductions. Tax codes are confusing, so it’s hard to decipher all of the rules and regulations.

In 1913, when income taxes were first instilled, the tax code book was only a half an inch thick. The very first tax return was only two pages with a four page instruction book. Things have certainly changed.

The tax code book is now two to four inch volumes and over a million regulations which explain what the code means. When you consider all of the tax-related court rulings that are attached to the code, you have 25 feel of library shelves.

The first thing a small business owner needs to realize is that with the same amount of profit, you won’t necessarily pay the same amount of taxes as another small business.

If you have ever wondered if others who make the same amount of money as you, but pay less in taxes, the answer is yes.

It’s legal for one business owner to pay less than another, even with the same income. Most small businesses pay more in taxes just because they own the wrong type of business. It doesn’t seem fair, but the truth of the matter is, it is legal.

The term “type of business” means whether you are a sole proprietorship, a partnership, a C corporation, an S corporation, or a limited liability company (LLC).

There are many types of business ownership. If you are not the “right” type, you will end up paying several thousand more in taxes than you need to. There are a lot of differences in the amount of taxes that these different kinds of businesses pay.

Sole proprietors generally end up overpaying their taxes because they are sole proprietors. Have you considered the tax benefits of a partnership, corporation or LLC? It’s what’s called a choice of entity analysis. By looking at the benefits of operating your business as anything other than a sole proprietorship, you could save thousands in taxes each year.

Talk to a tax professional to find out if changing your “type” of business will help you pay less in taxes.

Daniel Stoica Accounting Professional

Sub-contractors and real estate and insurance agents are just a few occupations that receive a 1099-MISC. These people are independent contractors and are considered self-employed. They are responsible for paying their own taxes. Taxes are not taken out through the year. They have to make sure they withhold enough every time they are paid for their work.

For self-employed people who have some knowledge of taxes, or have retained the services of a tax professional, using the 1099 can be a good thing. If they are newly self-employed, however, there could be some major issues come tax time.

Regular employees have federal, state and payroll taxes taken out of their net wages every pay day. These employees are not completely responsible for their taxes, but someone who is considered and independent contractor is. Every quarter, an independent contractor needs to pay into their taxes. The way to figure your taxes is either 100% of last year’s tax liability or 90% of this year’s tax liability. If you don’t pay enough throughout the year, you will end up owing at tax time.

Another important factor about being an independent contractor is to keep track of ALL of your expenses through the year. Those who receive 1099′s can deduct expenses like a business owner can. Many small business owners and independent contractors use the same Schedule C to report their income.

Auto expenses and mileage are the most important expenses an independent contractor needs to keep detailed records of. The IRS allows for 50 cents for every mile driven for business purposes, plus gas, repairs, depreciation, and insurance. You will have to decide if you want to take the actual expense deduction or the standard mileage rate.

You must also take into consideration the actual definition of business miles. You cannot claim all miles you have driven, only those miles that are used for business purposes. Miles driven from your office to, say, appointments, are considered business miles. Miles driven while not working cannot be deducted.

If you choose to use the actual expense method, you can figure your deductions by totalling your auto expenses and multiplying that number by how many miles driven.

Some other expenses you can deduct as an independent contractor are:

~ Advertising expenses
~ Office supplies
~ Cost of uniforms/Equipment
~ Utilities
~ Insurance
~ Interest paid
~ Legal/professional services
~ Meals and Entertainment Expenses
~ Lodging expenses

The last issue an independent contractor needs to be aware of it the home office deduction. If you use part of your home strictly for the use of your business, you can take a deduction. It offers the ability to deduct part of your living expenses, which include rent or mortgage, insurance, taxes, and utilities. This deduction will also let you use some of your commuting miles into business miles.

If you have two offices or work locations (one outside the home and one in your home), you can use commuting miles as business miles. In addition to the Schedule C, you will have to file an 8832 form to take the home office deduction.

An independent contractor and self-employed person needs to understand what they are able to deduct in order to save money on your taxes. Purchasing tax software with expense and deduction spreadsheets or hiring a tax professional are two ways to help you save as much money on your taxes and may keep you from owing the IRS at tax time.

 Daniel Stoica Accounting Professionl

You can get tax relief on the money you spend on education expenses. These benefits are for part-time and full-time students, married students, and parents of dependent students.  Check with your tax professional, but there are a few credit options to choose from for educational expenses.  

There are a few to choose from.

Hope Tax Credit

You can reduce your federal tax by as much as $1,800 for each student on tuition and fees that are not paid by student loans. You may take this claim for two years, if you:

• Have not yet completed the first two years of your education,
• Are enrolled in a program that leads to a degree, certificate, or other diploma,
• Are enrolled as at least a half-time student in your major for one semester during the year,
• Don’t have any felony convictions that are drug related.

School tuition and fees, minus any grants or scholarships, qualify for the Hope Credit. Check with your school’s financial aid office to find out if books and supplies are covered because they generally aren’t. This tax credit does not cover room and board, insurance, transportation, or medical fees.

To claim a Hope Tax Credit, you must file using the 1040 or 1040A and attach the 8863 (Education Credits). Itemizing your deductions is not required.

Lifetime Learning Tax Credit

You might be able to claim a Lifetime Learning Credit of up to $2,000 for education expenses paid for students enrolled in eligible higher education. There is no limit on the number of years the lifetime learning credit can be claimed for each student.

You can claim this credit if your family has children enrolled at an eligible college or university. The Lifetime Learning Tax Credit:

• Isn’t based on the student’s course load and it is allowed for more than one course,
• It isn’t limited to students in their first two years of college,
• Can be claimed for expenses for graduate-level courses,
• Has no limit on the number of years the credit can be claimed for each student,
• Doesn’t increase based on the number of students receiving qualified expenses.

To claim a Lifetime Learning credit, you need to file using the 1040 or 1040A and attach the 8863 (Education Credits). Again, you don’t have to itemize your deductions.

Tuition and Fees Deduction

You can reduce income that is taxed by up to $4,000 for tuition and related expenses. Tuition and fees required for enrollment at an eligible college, university, or vocational school are qualifying expenses. These expenses must have been made by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent.

To claim this deduction, you must file the 1040 and, once again, you do not have to itemize your deductions.

Student Loan Interest Deduction

If you have student loans, you might be able to deduct up to $2,500 in yearly interest. In order to qualify, you should have used the loan for higher education expenses, including tuition, fees, room, board, supplies, and other related expenses.

If you have already paid at least $600 in interest on your student loans during the year, you will receive a 1098-E (Student Loan Interest Statement) from the bank, a government agency involved in student loans, or from your school’s financial aid office.

To claim this deduction, you must file the 1040 or 1040A. Itemizing deductions is not required here, either.

Before you decided on which credit or deduction works best for you, seeking the advice of a tax professional or your school’s financial aid counselor would help you find out which one will benefit you most.

Daniel Stoica Accounting Professional

Even though the federal tax season ended on April 18, the IRS is still receiving information about tax scams. Two new scams are targeting the families of Military personnel and many e-mail users. In both cases, the perpetrators are posing as employees of the IRS.

The IRS has seen several cases of scams that targets the families of Military personnel.

The IRS wants taxpayers to be aware of the first scenario where a telephone caller, posing as an IRS employee, claims that the taxpayer is entitled to a  refund because their relative is in the Military. They then proceed to request a credit card number in order to cover the postage fee. The scammer gives the actual IRS toll-free number to make the call seem legitimate. Once the scammers have the credit card number, they make countless purchases with the victim’s information.

When actual IRS employees call taxpayers, they will NEVER ask for credit card numbers or request fees for anything.

These types of scams have been going on for years and, sadly, many people still fall prey to them and, before they know it, thousands have been charged to their credit cards. The IRS asks that taxpayers remember that they do not charge for refunds or ask for credit card information.”

In the other scam, victims get an e-mail that looks like it’s from the IRS. The e-mail provides links to a non-IRS web page which requests personal and financial information. The information is then used to steal your identity and gain access to your sensitive financial data.

Identity thieves use your personal data to:

-Take over your financial accounts,

-Make purchases on your existing credit cards,

-Apply for loans, credit cards, services or benefits in your name, and

-File fraudulent tax returns.

The IRS will NEVER ask for your personal or financial data via e-mail.

Both of these scams are under review by the Treasury Inspector General for Tax Administration. They are currently investigating the abuse of the IRS name, insignia, seals, and symbols.

Taxpayers who believe they have been scammed need to contact TIGTA by calling their toll-free fraud referral hotline at 1-800-366-4484, or by faxing a complaint to 202-927-7018. You can also write the TIGTA Hotline at: P.O. Box 589, Ben Franklin Station, Washington, D.C. 20044-0589.

These are not the first scams that involve scammers who impersonate IRS employees, nor they will be the last. However, the IRS is working diligently to put a stop to them.

These thieves have impersonated IRS agents in the past by even showing up at a taxpayers’ home,  claiming to collect taxes. Genuine IRS agents and collection officers will produce a picture ID and will contact the taxpayer before they visit.  In another scam, the con artists send out false bank correspondence and phony IRS forms in order to trick the taxpayer into giving them their personal and financial information. These thieves then use this information to pose as the taxpayer to gain access to the their finances.

If you ever have questions about your correspondence with the IRS, either by phone, email or postal mail, please contact the IRS or a qualified tax professional right away. 

Daniel Stoica Accounting Professional