1. "Like it or not, you may need help with your taxes."
When Cindy Hockenberry and her husband sent in a tax-penalty payment in 2007, they knew there was a chance their math might not jibe with the IRS's. When that turned out to be true and the amount was much higher than expected, they decided to dispute it. Fortunately for them, Hockenberry's a pro. As tax research coordinator at the National Association of Tax Professionals, she spotted a glitch in the IRS's calculation; after visiting the local IRS office, the agency admitted its mistake and lowered the penalty. "There's no way the average taxpayer would have noticed," she says.
As recently as 2000, less than half of all taxpayers were using a preparer. Today 80 percent use software or a tax pro, "because they're scared of making a mistake," says Nina Olson, the National Taxpayer Advocate. "That's a sign the system's too complex." A pro may not be necessary for basic returns that include just a W-2 and, say, mortgage interest; in those cases, TurboTax will do. However, if you've made a lot of market moves or run a side business, consider a preparer. (You can find one at www.natptax.com; expect to pay $150 to $200 per return.)
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2. "You don't have to be rich to get audited."
The IRS's job is to enforce the tax laws enacted by Congress and to collect what's due. Its primary weapon? The audit, whose use has more than doubled since 2000, to surpass 1 percent of all returns, according to the Transactional Records Access Clearinghouse, a Syracuse University data-research organization. The increase can be attributed to the rising number of so-called correspondence audits -- those done through the mail asking for specific information rather than, say, investigating your whole return, says Susan Long, codirector of the organization. "It's more efficient."
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One way to get the IRS's audit sensors tingling is to claim deductions much higher than are typical for your income level. We'd share them with you, but the IRS keeps that information under wraps. What's more clear: Big charitable donations have been getting a much closer look, says Bob Meighan, VP of TurboTax. "It's been an area of abuse for a while," he says. To protect yourself, get a receipt for any donation you plan on deducting. And keep those receipts for seven years -- unless it suspects you of outright fraud, that's how far back the IRS will go with an audit.
3. "Fear is often our best weapon."
The threat of an audit is enough to send many folks scurrying to their tax preparer, and no wonder. "With audits, you're assumed guilty until proven otherwise," says Long. It's this fear, coupled with the complexity of the system, that causes some to overpay their taxes by not taking deductions they're entitled to, according to experts. A study by the Government Accountability Office found that 2.2 million people a year overpay, by an average of $438. "Americans are leaving a lot of money on the table," says Roni Deutch, a Sacramento-based tax attorney.
The GAO report listed mortgage interest, personal property tax, and state and local income tax as the main deductions not being taken. But there are more. Net market losses can be deducted up to $3,000, and if you lost more, you can roll it over into the next year. (Note: To claim a loss now, you need to have sold the stock last year.) You can also deduct things like tax-prep software, a résumé service and IRA fees if they total more than 2 percent of your adjusted gross income. Bottom line: "Take every legitimate tax break out there," says Kay Bell, a tax expert at Bankrate.com. "Just make sure you can justify it."
4. "The AMT is our ATM."
When the alternative minimum tax was introduced in 1969, it affected only a handful of taxpayers with high income and big deductions. But by 2010, it will hit 87 percent of married couples with income between $75,000 and $100,000. That's not what it was designed to do; the AMT was meant to force big earners with lots of deductions to pay their fair share. Now it "brings in a group of taxpayers the IRS has no problem with," says Olson. "The AMT has run its course." The problem is, the AMT hasn't been updated to account for inflation. Instead, Congress has been adjusting exemption criteria on a yearly basis. "It's just a Band-Aid," says Hockenberry.
The Band-Aid in this year's stimulus plan reduces the number of taxpayers subject to the AMT to 4.4 million -- it would've been 30 million, according to the Tax Policy Center. But if you're living in a high-tax state or married with two or more kids, you might find as you calculate both your regular return along with the AMT -- form 6251, which taxpayers are responsible for -- that you could be liable for the latter. Confused? The IRS offers AMT assistance at www.irs.gov; click on "Online Services."
5. "Just because we billed you doesn't mean you owe us money."
Receiving a CP2000, also known as a correspondence audit, sure sounds scary, but in most cases, you don't actually owe any more money. Not that the IRS will make that clear -- it's likely billing you because of a discrepancy on a certain deduction or reported income; then it's up to you to prove otherwise. But as the number of these audits have risen, up 176 percent since 2000, the chance for error goes up as well. The IRS says 98 percent of the audits it sends out require clarification, not payment, but Charlotte Ogorek, an Illinois-based enrolled agent, thinks it's more like 85 percent.
Even if the charge is unfounded, to appeal it could cost you anywhere from $500 to $4,000, depending on how long it takes, says Bill Wandel, a licensed taxpayer rep at JK Harris. If you plan to challenge a CP2000, contact your local taxpayer advocate from the IRS (go to www.irs.gov/advocate to find yours), who will provide advice and representation free. If it turns out you need even more expertise, contact a tax lawyer or an enrolled agent (a professional licensed by the IRS to represent taxpayers in front of the IRS). Find one at www.naea.org.
6. "If you don't pay, we'll sic a collection agency on you."
If you thought dealing with the IRS was bad, wait till you're past due on a payment and get turned over to one of the two private collection agencies the IRS taps to help collect its money. Since 2005, the IRS has been assigning delinquent taxpayer accounts to either Pioneer Credit Recovery or the CBE group of Iowa -- much like any other business or lender. "These are federal taxes," says Olson, the National Taxpayer Advocate. "The IRS should be collecting them." The retention of these private agencies costs $7.65 million annually, yet when the IRS works these cases instead, "it's three times more productive," Olson says. (A spokesperson for Pioneer Credit Recovery and CBE says the issue isn't who can do the work more efficiently; it's whether these taxes would be collected at all without the private collection agencies.)
If the IRS puts a private collection agency on your case, Olson says the first thing to do is to request that your case be turned back over to the IRS. The reason: IRS collectors have the authority to offer you a compromise settlement, something the private agencies aren't authorized to do.
7. "Want to go green? We'll help pay."
Tucked into last year's unprecedented $700 billion bailout plan was some pork that even a vegan could love. Congress not only added an extension of the eco-friendly Energy Policy Act of 2005, which was set to expire at the end of 2007, but it also sweetened the pot for homeowners looking to green up their homes.
Want to grab some energy from the sun? Starting in 2009, a number of energy-saving steps will garner tax breaks for green consumers. Installing a photovoltaic system for solar energy, for example, will net you a tax credit worth 30 percent of the total cost; at www.solar-estimate.org you can find out the price and potential savings of installing a system in your neighborhood. Or if you're gung-ho for wind energy, you'll get up to $4,000 or 30 percent of the cost of installing a small home windmill system to generate energy. Check out the National Renewable Energy Laboratory's "In My Backyard" tool at its Web site to see how much energy you can expect to get from a windmill. For homeowners who aren't looking to go quite that green, there will be a $500 onetime credit for installing energy-efficient windows, insulation or a central air system.
8. "April 15 isn't necessarily a hard deadline."
If you're one of the 112 million taxpayers who receive a refund every year rather than owing more, you have a lot more flexibility around the standard Apr. 15 deadline than you might think. Feeling rushed this year? By filling out IRS form 4868, which you can find online, you can buy yourself a no-questions-asked six-month extension on filing your taxes. And you can file the form requesting your extension as late as Apr. 15 without incurring any penalties. The only catch -- and it's significant for some: If you do owe any taxes, then you must still pay those by the 15th.
How do you know if you're going to owe taxes this year? If your life is basically the same year to year, then your refund is pretty much on autopilot, says Bell. But any big changes -- such as a large increase in salary, unexpected commission or year-end bonus, or having a child go from dependent to independent -- could potentially swing you into the loss column. So when in doubt, do the math in advance, or check with a tax pro to see if there's anything you should be worried about.
9. "We may be a government agency, but that doesn't mean your data's safe."
One things you may not be thinking about as you file your taxes this year is that the documents you're sending off to the IRS contain virtually every piece of information an identity thief would ever need to drive your credit, and your sanity, into the ground. And considering that data breaches are on the rise -- up 47 percent in 2008 from 2007, according to nonprofit Identity Theft Resource Center -- protecting your information, which includes your Social Security number and home address, should be paramount. But a recent report by the Treasury Inspector General for Tax Administration (TIGTA), an independent IRS oversight organization, casts some doubt on the agency's ability to protect your information. For example, TIGTA says two new systems the IRS is implementing to manage taxpayer accounts and account data were "deployed with known security vulnerabilities in the controls over sensitive data protection, disaster recovery and system access."
Alarming as this information is, it's hardly a new problem at the IRS, says J. Russell George, inspector general for TIGTA. "We've seen this before when they implement a new system. The organization's unwillingness to change its behavior is potentially harmful to taxpayers," he says. (The IRS had no comment.)
10. "We may still have your refund."
Waiting on a refund? Typically, it takes three to six weeks to get your money back from Uncle Sam, depending on whether you e-filed or sent your paper return through snail mail. Either way, the IRS does a pretty good job, by and large, of getting refund checks out to taxpayers in a timely manner. But the agency's record is hardly perfect: Every year a fraction of refunds -- belonging to more than 100,000 taxpayers, and with an average due of $988 -- never get to their destination.
What's the problem? According to the IRS, these undelivered refunds are mainly due to issues regarding the accuracy of a taxpayer's mailing address or direct-deposit information. For example, people move and don't leave a forwarding address, handwritten returns may be illegible, or the direct-deposit routing number may be off by a digit or two. If you haven't received your tax return in a reasonable amount of time, check out the IRS's "Where's My Refund?" tool on its Web site.