I don’t suggest planning based on the odds of the IRS catching you. To the contrary, such planning is both unethical and foolish. In general, tax help, and in particular help from a California tax attorney, could be more necessary than ever for those who attempt to play the odds.
Audits are definitely up this year – in almost all categories – as compared to prior years!
Odds are that playing fast-and-loose with the information you report doesn’t pay. Whether you live in Los Angeles County, Orange County, Santa Barbara County or Ventura County, tax problems can easily arise when tax avoidance is overly aggressive.
The latest IRS data book has just been released. It contains some eye opening information on the number and percentages of audited income tax returns and where the IRS concentrates.
Here’s the most recent tax audit data for the number of tax returns examined by the IRS: Download file
COMMON FILING MISTAKES:
IRS Notice 2007-35 alerts taxpayers to common mistakes made on individual income tax returns.
These mistakes may result in taxpayers failing to fully pay their correct tax liabilities, or result in delays in processing returns and receiving refunds.
1. Choosing the wrong filing status. Confirm that the filing status (i.e., single, married filing jointly, married filing separately, head of household, qualifying widow(er) with dependent child) selected on the return is correct.
2. Failing to include or using incorrect Social Security numbers. The names and Social Security numbers for the taxpayer, taxpayer’s spouse, dependents, and qualifying children for the Earned Income Credit or Child Tax Credit must be included on the return exactly as they appear on the Social Security cards.
3. Failing to use the correct forms and schedules. Review instructions to all applicable forms and schedules to be sure they have correctly used, and accurately completed, each form or schedule.
4. Failing to sign and date the return. Be sure the return has been signed and dated. If the return is not signed, it will not be accepted as filed by the Service. If it is a joint return, both spouses must sign the return.
5. Claiming ineligible dependents. Remind clients that taxpayers may claim a person as a dependent only if that person meets the legal definition of a dependent. Each dependent must have a valid Social Security number (or other Taxpayer Identification Number, as applicable), which must be included on the tax return. The failure to include a dependent’s name and Social Security number, or claiming an ineligible dependent, may result in an underpayment of tax and/or a denial of the Earned Income Credit.
6. Failing to file for the Earned Income Credit. Review the eligibility requirements for the Earned Income Credit, including income limits, before filing returns. For example, many military families may qualify for the credit because they can choose to include or exclude combat zone compensation in the income calculations, depending on which treatment is more favorable.
7. Improperly claiming the Earned Income Credit. Taxpayers must have earned income from work to claim the Earned Income Credit. For example, a taxpayer whose sole income is from Temporary Assistance for Needy Families or Social Security benefits does not have earned income and is therefore ineligible for the credit.
8. Failing to report and pay domestic payroll taxes. Taxpayers employing household workers, such as a house cleaner, an in-home caregiver, or a nanny, must report and pay payroll taxes for those individuals when the payments exceed certain threshold amounts. Failure to pay and report payroll taxes may result in the assessment of additional tax due, interest on the unpaid amounts, and penalties.
9. Failing to report income because it was not included on a Form W-2, Form 1099, or other information return. Taxpayers must include on their tax returns income reported on a third-party information reporting statement such as a Form W-2 or Form 1099, or other similar statement. But even if income was not reported on a third party reporting statement, taxpayers must still report all income. Failure to report all income may result in the assessment of additional tax due, interest on the unpaid amounts, and penalties.
10. Treating employees as independent contractors. Employers may not treat an employee as an “independent contractor” to avoid paying and reporting payroll taxes. Employers who improperly treat an employee as an independent contractor may be liable for additional tax due, interest on the unpaid amounts, and penalties.
11. Failing to file a return when due a refund. Taxpayers must file a return to claim a refund of withheld taxes when a refund is due. Taxpayers will forfeit refunds of withheld tax if a return requesting a refund is not filed within three years of the due date.
12. Failing to check liability for the alternative minimum tax. Taxpayers should determine whether the alternative minimum tax, or AMT, applies. If a taxpayer is liable for AMT but does not include it on the return, the Service will determine the taxpayer’s liability and may reduce or deny a requested refund or assess any additional tax due, interest on the unpaid amounts, and penalties.
13. Failing to request federal telephone excise tax. Taxpayers can request a one-time credit of $30 to $60 for federal excise taxes paid for long-distance or bundled (local and long-distance) telephone service billed after February 28, 2003, and before August 1, 2006, whether for landline, cell phone or Voice over Internet Protocol service. Alternatively, taxpayers can request a one-time credit for the actual amount of excise taxes paid during the period using Form 8913, Credit for Federal Telephone Excise Tax Paid.
14. Failing to accurately use or compute the Schedule D Tax Worksheet or Qualified Dividends and Capital Gain Tax Worksheet. Taxpayers should determine which worksheet they should use when computing their tax. Failure to use the correct worksheet may result in a reduction or denial of a requested refund or an assessment of additional tax due, interest on the unpaid amounts, and penalties.
15. Failing to enter the correct amount of taxable Social Security benefits. Taxpayers should report not only the total amount of their Social Security benefits, but also the correct amount of taxable Social Security benefits. In addition to delaying the processing of the tax return and any refund, reporting the incorrect amount of taxable Social Security benefits may result in an assessment of additional tax due, interest on the unpaid amounts, and penalties.
16. Mailing a return to the wrong address. Taxpayers who file their income tax returns by mail should send the returns to the appropriate Internal Revenue Service Center based on where the taxpayer lives and whether the taxpayer is including a check or money order with the return. Forms 1040, 1040-A, and 1040-EZ Instructions, as well as the “Where To File” resource available on www.irs.gov, list the applicable mailing addresses according to where the taxpayer resides. Taxpayers who receive one of the Form Series 1040 booklets in the mail may also use the pre-addressed envelope that is included in the booklet to mail the return, unless the taxpayer has moved to another area with a different filing location. Mailing an income tax return to the wrong Internal Revenue Service Center or otherwise misaddressing the return could delay the processing of the return and any refund. I.R.B. 2007-15, dated Apr. 9, 2007.
COMMONLY OVERLOOKED TAX BENEFITS:
Before you file a client’s return, take a moment to be sure the client (or you) have not overlooked several important benefits. Check to see if the client is entitled to the special telephone excise tax refund and other benefits such as the Earned Income Tax Credit.
Telephone Excise Tax Refund –– This is a one-time refund of long distance excise taxes available on 2006 income tax returns. The refund applies to charges billed from March 2003 through July 2006. The IRS offers a standard refund amount of $30 to $60, or taxpayers can calculate the actual tax paid. Even if the taxpayer does not normally have to file a return, Form 1040EZ-T can be used to request this refund. Businesses and exempt organizations can also request it. Taxpayers can visit IRS.gov for more information on this special payment.
IRS Free File –– Nearly 20 companies are offering free electronic filing to taxpayers whose 2006 adjusted gross income was $52,000 or less. That means 70 percent of all taxpayers, 95 million individuals, can take advantage of the IRS-sponsored Free File program. A link to Free File offerings is located on the IRS.gov homepage.
Earned Income Tax Credit –– Earned income of less than $39,000 in 2006 may qualify a taxpayer to claim the earned income tax credit. This credit could be worth up to $4,536. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return. An electronic special “EITC Assistant” is available on IRS.gov to help taxpayers determine whether they are eligible. Taxpayers can access more information on this credit by visiting IRS.gov and clicking on “1040 Central.”
Free Tax Help –– Tax help sites in libraries, churches, community centers and other locations are staffed by trained volunteers. Taxpayers who earned less than $39,000 and file a simple tax return can call 1-800-829-1040 to locate the nearest Volunteer Income Tax Assistance Program site. In addition, senior citizens can take advantage of the free IRS Tax Counseling for the Elderly program by calling 1-800-829-1040 or AARP’s Tax-Aide counseling program at 1-888-227-7669.
Unclaimed Refunds –– Refunds totaling approximately $2.2 billion are waiting for approximately 1.8 million people who failed to file a federal income tax return for 2003. In order to collect the money, a return for 2003 must be filed no later than April 17, 2007. The IRS estimates that half of those who could claim refunds would receive more than $611. In some cases, individuals had taxes withheld from their wages, or made payments against their taxes out of self-employed earnings, but had too little income to require filing a tax return. Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Taxpayers who need help also can call the IRS help line at 1-800-829-1040.
Call tax attorney Mitchell A. Port if you need tax help for an IRS exam or audit at (310) 559-5259.