Tips for Tax Time | Know the Rules, Avoid an Audit

Better safe than sorry

You may think that with all of the other problems the government is dealing with they don’t have time to worry about whether you did your taxes right. However, the opposite is true.

In the last 10 years the IRS has more than doubled the amount of audits it conducts. It uses a complicated formula to decide who it will audit, but there are a few steps you can take to decrease the chances that it will be you.

Take advantage of technology

There are plenty of web sites out there that will let you submit your taxes online. Filing electronically is helpful in a lot of ways. Forgetting to sign tax returns is a very common mistake, but tax software and web sites won’t let you submit a return without an electronic signature.

Most sites and software programs also have built-in programs that check for mistakes on your paperwork so you can catch and correct mistakes before you submit your taxes.

Keep track of donations

Taxes are a good example of a time when doing the right thing can come back to bite you. Deductions for large charitable donations will raise red flags for the IRS. Average charitable donations are usually no more than 2 percent of a person’s income. If you have donated  more than that, make sure you explain what the donation was for and why it is so big. Also, it’s very important to include receipts.

Proof to back up big deductions

Other large deductions will raise red flags, too. Many medical bills can earn deductions, but if you have an especially large medical bill that amounts to a large deduction, make sure you have careful documentation. Make sure you have copies of your bills, especially if they amount to more than $50,000.

If you’re itemizing deductions, remember that any deductions for meals or entertainment that cost more than $75 requires a receipt.

Extension does not defer payment

If you file for an extension on your taxes, remember: An extension only puts off submitting your tax forms. It does NOT put off the date you must pay if you owe money to the IRS. Any taxes you owe are due by April 15. If you can’t pay the full amount you owe, you must set up a  payment plan before April 15.

Steer away from credit cards

Already millions of Americans have used credit cards to pay off their taxes this year. Using a credit card to pay tax bills is a huge mistake. With convenience fees and interest, it could take years to pay off a tax bill. When people owe taxes, the average amount is $2,200. Including convenience fees, if a person made minimum payments at 12 percent interest it  could take up to 14 years to pay off that amount.

Unemployed or underfunded

If you owe less than $25,000 in taxes and you can pay it off within five years, you can arrange a payment plan with the IRS. You will have to pay interest, but the rates are generally a lot more favorable than a regular loan. And the IRS interest rate will be a fraction of a credit card interest rate.