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How to Avoid a Tax Audit

Avoid tax Audit

While there is no guaranteed method of avoiding audits, there are things to steer clear of that could trigger an IRS audit. The Senate recently approved nearly $80 billion in IRS funding, with $45.6 billion for enforcement, which could lead to more audits.  Here are some things that the IRS has historically viewed as “red flags,” which could increase the chances of an audit for taxpayers. 

Reporting a Business Loss  

The IRS will surely be more inclined to audit a taxpayer who reports a net business loss, even if the loss is small. Reporting losses year after year will only increase IRS interest in your tax returns. Remember, it is mandatory to report all earnings in a tax year. However, it might be helpful to reconsider which expenses should be deducted from your tax return. Reporting even a small profit could reduce the chance of being audited by the IRS.  

Being Vague About Expenses 

When it comes to expenses, the more detail the better. This is especially true when categorizing them on your return. Try to avoid listing expenses under “Other Expenses” as this will lead to more scrutiny from the IRS. It may even be helpful to provide supplemental documentation explaining why certain expenses drastically increased or decreased for that year. Doing so can give potential auditors a valid explanation for such occurrences and possibly avoid a tax audit. Additionally, rounding dollar amounts are red flags for the IRS. You should always use exact dollar amounts on your tax return

Filing Late 

Some taxpayers believe that filing late can actually decrease the risk of being audited. However, filing on time, as well as paying on time, can help establish a history of IRS compliance. This will be far more beneficial in the long run.  

Claiming Excessive Deductions 

It is best to avoid any excessive expenses. For example, deducting the cost of your breakfast and lunch each workday may not be acceptable to the IRS. Excessive deductions for your donations to charitable organizations can also increase the chances of being audited. Inflating business expenses can result in being audited, especially if you try to claim large amounts for business entertainment or claim a vehicle that is used for business purposes 100 percent of the time. Also, remember to only claim the home office deduction for the portion of your home that is used exclusively for business purposes. When claiming this deduction, you will need to figure out how much square footage in your home is dedicated to your business. For tax year 2023, the rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet or $1,500. 

Keeping Poor Records

Even the simplest tax situations require adequate records. If your finances are more complicated, then detailed records are necessary. Some taxpayers may feel inclined to estimate their expenses because they did not save receipts or documents. Unfortunately, the IRS views this as a red flag. It’s important to make sure you have detailed records for the past three tax years at minimum. Having items like your previous tax returns, medical bills, business receipts, real estate documents, and investment statements can help substantiate your claims and avoid an IRS audit.

Choosing the Wrong Filing Status

Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions. it affects what forms you’ll fill out, which deductions and credits you’ll take. It ultimately determines how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for their errors. This includes deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.

Tax Relief for Those Being Audited 

The chances of being audited are low, but those chances increase when the IRS notices red flags. The audit process can be very stressful. It is a tedious process that requires collecting information regarding your income, expenses, and itemized deductions. Failing an audit can result in a huge, unexpected tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Our team of qualified and dedicated tax professionals can help.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

New Consequences of Payroll Tax Liability

payroll

The responsibility of payroll taxes falls on the shoulders of employers, although they come from employee paychecks. The federal government, Social Security and Medicare heavily rely on taxes from employee wages.

IRS revenue officers are now tracking how unpaid payroll taxes were spent during their “trust fund investigation.”

Payroll Taxes Used for the Employer’s Benefit

Employers will now face more penalties for payroll fraud. This can include wrongfully spending payroll taxes or pocketing it for themselves. Maintaining a luxury lifestyle while owing payroll taxes can now lead to prosecution.

Revenue officers are being instructed to pull employer 1040 tax returns to learn whether the money that benefited them was reported as income. If the money was not reported as income, the RO will submit the returns and investigation records to the civil audit division. Another option is that the RO will refer the case to the IRS Criminal Investigation Division to review for criminal prosecution. The course of action made by the RO depends on the severity of the case.

What This Means for Business Owners

Business owners should utilize their tax professionals and seek advise to avoid any possible criminal activity. It’s important to review and track where the payroll money goes for the year. If you know that some of your payroll tax money went to yourself as an employer, you should prepare to amend your income tax returns before the IRS catches up to you.

Avoiding handling this matter could put you in a worse financial situation, or even lead to prosecution.

Payroll Tax Debt

If you are currently in unaffordable tax debt, Optima’s team of tax professionals may be able to aid your case. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a No-Obligation Free Consultation 

The Consequences of Owing Taxes

the consequences of owing back taxes

Owing the IRS can be a scary and confusing time, especially if you don’t know what to expect. The IRS has protocols to collect past due balances. This article will review the consequences of owing taxes.

Interest and Penalties

The IRS adds interest to your tax liability daily until you pay it in full. The maximum penalty is 25% of your unpaid tax. The current interest rates are:

  • 8% for overpayments for individuals
  • 7% for overpayments for corporations
  • 5.5% for the portion of a corporate overpayment exceeding $10,000
  • 8% for underpayments for individuals
  • 10% for overpayments for corporations

Penalties include:

  • Failure to file – If you don’t file your return or an extension, and owe, the IRS will penalize you. The penalty is currently 5% of the unpaid taxes for each month or partial month that a tax return is late, up to 25% of your total unpaid tax bill.
  • Failure to pay – If you don’t pay your taxes, the IRS will penalize you at 0.5% for each month or partial month your tax balance goes unpaid, up to 25% of your total tax bill. 
  • Accuracy-related – You may be given the IRS negligence penalty for errors. This can up to 20% of the portion of the underpayment of tax resulting from negligence..

IRS Wage Garnishment

The IRS has the ability to garnish your wages when you have an unpaid balance. This means that the IRS can seize your income and apply it to your tax liability. They can also garnish your paychecks, commissions, and bonuses. By paying the balance in full, or setting up a payment plan, you can stop garnishments.

IRS Levy

You would receive a notice prior to the IRS levying the balance. This consequence is for delinquent taxpayers and involves the IRS legally seizing your bank accounts, wages, or property to settle the tax debt. To stop a levy, contact the IRS directly. If you can prove that you’re in hardship, they may release the levy. You can also pay the balance in full to release a levy sooner.

IRS Lien

Liens are placed on physical assets, such as homes or vehicles, to satisfy tax debt. This means that the IRS takes possession of your assets, or collects a portion of what you make for selling them. You can avoid a lien by paying your balance in full, on time, or by contacting the IRS for a payment plan.

IRS Passport Denial

Major tax debt can result in the denial of acquiring a passport. State Departments can also revoke an existing passport if you’re delinquent. The IRS is allowed to deny citizens the right to travel internationally. If you receive a notice while overseas, you may receive a temporary passport to return to the US.

You can reverse passport denial by changing your status (no longer seriously delinquent), if the debt becomes legally unenforceable, or by satisfying the tax debt.

Unaffordable Tax Debt

Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Revenue Officers and Small Businesses

Many small business owners are at risk of being assigned a Revenue Officer (RO). If a small business withholds taxes from their employees but fails to hand it over to the IRS, the IRS can assign an RO, garnish bank accounts and wages, seize property and real estate, and even show up at your place of business. CEO David King and In-house Expert & Enrolled Agent Rosie Steele provide helpful tips on what small business owners should do if they are assigned an RO.

What is IRS Notice 1444 and will you need it for filing your 2021 taxes?

calculating taxes

With the pandemic still ongoing and many Americans out of a job, the distribution of two stimulus checks has helped many individuals pay their bills. Now that it is tax filing time, tax filers should have received Notice 1444 in the mail from the IRS. This notice will be required when filing your taxes in order to notify the IRS you have received the stimulus check.

Understanding Notice 1444

If you were sent Notice 1444, you probably received an economic impact payment (EIP), also known as the stimulus payment. Notice 1444 was sent out to each stimulus recipient within 15 days of the IRS issuing out the payment. The notice should indicate the following:

  • The amount of the payment.
  • A phone number to call if a recipient has any questions.
  • Where a recipient can find information about their payment.
  • How the payment was made i.e. direct deposit, check, or debit card.
  • A reminder to keep the notice with your taxpayer records for your 2020 tax return.

Why Notice 1444 was mailed out

Notice 1444 was issued by the IRS to recipients of the economic impact payment. It should be kept with other important tax documents to be used for when it comes time to filing your 2020 taxes. For those who did not receive the full amount for the stimulus payment but qualified for the full amount, having Notice 1444 will come in handy. The notice will reflect the total amount you received and can be used when filing your taxes in order to get the rest of your payment.

Is there a deadline for IRS Notice 1444?
There is no deadline for Notice 1444. It is important that taxpayers hold on to their notice and file it away with their other tax documents for end of year tax preparation.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

What Does IRS Code 9001 Mean?

What Does IRS Code 9001 Mean?

There are still many IRS terms and codes that are a mystery to the average taxpayer. Tax terms can be confusing, whether you’re a first-time tax filer or have been filing tax returns for years. IRS Code 9001 is a common error code, but many people don’t know what it means. We’ll explore what the IRS Code 9001 is, and how to avoid it.

IRS Code 9001

You filed your federal income tax return a while ago and you are expecting a refund. You can check the status of your return and your refund check (for paper returns) or direct deposit (for electronic returns) at the IRS.gov website. The “Where’s My Refund?” portal also provides an estimate of when you should expect your refund.

If you receive an error code such as IRS Code 9001 when you check the status of your return, you may worry that your return has been flagged for an audit. Relax. In fact, IRS Code 9001 is one of an entire set of codes that are included within the Internal Revenue Manual (IRM), which is the set of guidelines used by the IRS. This is not an audit flag, but rather an error code generated when taxpayers attempt to access return or refund results using the wrong Social Security Number or TIN.

Where’s My Refund?

The IRS established the “Where’s My Refund?” portal to allow taxpayers to check the status of their federal income tax return and refund. To access the portal you need three pieces of information: your Social Security Number (SSN) or Taxpayer Identification Number (TIN), your filing status, and amount of the refund that you are expecting. This refund amount should be listed in whole dollars and must match the amount listed on your tax forms exactly.

Taxpayer Identification Number (TIN)

Most taxpayers include a SSN on their tax returns. But certain taxpayers, such as resident and nonresident aliens, are not eligible to get one. The TIN is designed to allow individuals to file federal and state income tax returns, without an SSN.

How to Fix an IRS Code 9001

In most instances, when you check the status of your return on the “Where’s My Refund?” portal, you will receive a message stating that your return is being processed or that your refund is on its way. Occasionally, you may receive one or more error codes, including IRS Code 9001: “Taxpayer accessed Refund Status using a secondary TIN. Refund Status could not be returned. Get a Primary TIN Analyze account and follow appropriate IRM.” The fix is simple – enter the proper Social Security number or TIN into the “Where’s My Refund?” portal. If you still receive error messages, contact the IRS or an expert such as an attorney with Optima Tax Relieve for further assistance.

Wondering where your tax refund is? Read our dedicated blog to learn more. If you need tax help, contact us for a free consultation.