{This
advice is taken from my book BOBSERVATIONS.
Click here for more information on this book.}
Nobody wants to hear from the Internal
Revenue Service – except to receive a refund check. Here are five things to do to avoid problems
with your “Uncle Sam”.
1.
First and foremost – file a complete and accurate tax return. The absolute best way to do this is by going
to a qualified, competent tax professional.
It will not necessarily cost you a lot of money – actually doing so will
probably save you more in federal and state taxes than you will pay for the
service.
Whatever you do – do not rely on a
“box” (i.e. tax software) to prepare a complete and accurate return if you do
not know the tax law. Remember –
garbage-in garbage-out. And the IRS or
the Tax Court will not accept the “Turbo-Tax Defense” if you screw up.
And, in my considered opinion, do not
use the services of a “fast food” tax preparation chain.
2. Report all your income. The IRS matches information reported on your
tax return to that reported on such information documents as 1099-INT,
1099-DIV, 1099-MISC and the Form K-1 from partnerships, Sub-Chapter S
corporations and estates and trusts.
Just because you have not received a
Form 1099 for income earned or received does not mean that one was not sent to
the IRS. Your copy could have been lost
in the mail or sent to an old or incorrect address. If a 1099 information return should have been
filed then assume it was.
Compare information reported on 1099
returns to your own records for accuracy and do the same thing with your Form
W-2s. A while back a client received a
1099-INT with someone else’s account, which earned $300+ interest, included in
the listing! Had he not carefully checked the form he would have paid close to
$100 in unnecessary federal and state income tax.
When you get a Form 1099 you believe
is incorrect the first thing you should do is contact the issuer (bank, mutual
fund, brokerage firm) and request a corrected return or an explanation. If they will not reissue the form correctly,
or do not explain to your satisfaction the difference, claim the gross amount
reported on your tax return (Schedule B for interest and dividends, Schedule C
for non-employee compensation, or Schedule E for rental income) and deduct any
corrections elsewhere on the Schedule so the correct amount is reflected in the
“bottom line”.
You want to make sure that (a) the
gross amount of income reported on your return matches exactly the amounts
reported to the IRS on information returns, and that (b) the net income on
which you are ultimately taxed is the correct amount.
If you have received a Form 1099-INT
reported under your Social Security number for bank interest on a joint
account, and you want to claim your half of the interest and have the co-owner
report his/her half, you should enter the name of the bank and the total amount
of the interest on your Schedule B and on the next line write “less amount
reported by co-owner XXX-XX-XXXX (indicate co-owner’s Social Security number)”
and deduct out half of the total interest.
If you receive a Form 1099 for
interest or dividends from the account of your dependent child that also has
your name on it as co-owner or custodian – an investment that truly belongs to
the child but is reported under your Social Security number – do the same
thing. Enter the total amount of income
on your Schedule B, write “less amount reported by XXX-XX-XXXX”, and deduct out
the full amount of the interest. On the
Schedule B of your dependent child you would write the name of the bank or
stock and next to it write “reported under XXX-XX-XXXX”.
3. Make sure that all the names and
Social Security numbers reported on your Form 1040 match exactly the names and
Social Security numbers as they appear in the records of the Social Security
Administration (i.e. – they are the same as they appear on the individual’s
Social Security card).
If when your son was born his last
name was recorded with SSA as hyphenated (i.e. father = Smith and mother =
Jones, so son = John Smith-Jones) and it appears that way on his SS card, but
over the years the hyphenation was dropped and he is referred to now as John
Smith, make sure to report the name as John Smith-Jones when identifying
dependents on the Form 1040 – unless you have officially changed the name with
SSA by requesting a new Social Security card.
I have had this very problem with a client a few years ago.
Similarly, if in a marriage the wife
took her new husband’s last name (i.e. Jane Jones now becomes Jane Smith), but
never changed her name with the Social Security Administration, make sure to
report her name as Jane Jones on the 1040.
If a wife chooses to take her husband’s last name as her married name
the first thing she should do, after returning from the honeymoon and mailing
out all the thank you notes, is to officially change her name with SSA by
requesting a new Social Security card.
This can be done at the SSA website.
4. Another piece of advice that bears
repeating. Do not accept tax advice from
anyone other than a qualified, competent professional tax preparer. Don’t listen to a broker, a banker, an
insurance salesman, or your Uncle Charlie!
You wouldn’t ask your auto mechanic for a medical opinion, so why would
you listen to tax advice from your MD?
Over the years clients have come to me
wanting to claim the strangest things – telling me “my neighbor” or “a guy I
ride in to work with on the train” said it was deductible. And it seems that just about every workplace
has a resident self-proclaimed “tax pro”.
If you are given any tax information
by a non-tax person make sure to check it out with your own tax professional
first before taking any action. You may have to pay your tax pro a few bucks
for the consultation – but it is money well spent and far more preferable to
losing thousands of dollars by following bad advice.
5. If you do receive correspondence
from the IRS do not ignore it. If you
receive a CP-2000 or other notice from the IRS, or a state tax authority,
indicating that income was omitted from your tax return, or asking for
clarification on an item reported on your return, or for any other reason, give
it to your tax professional immediately so that he/she can respond accordingly.
If you prepared your own return review
the notice carefully and respond promptly.
If you do not understand the notice, or are not sure what to do, consult
a qualified and competent tax professional.
In my 40+ years of experience I have
found that about 75% of the notices received from the IRS or a state tax agency
are incorrect. You should not just
automatically assume the notice is correct and pay the amount requested without
verification.
However, do not ignore IRS
correspondence. You must respond to all notices you receive – even if only to
point out the errors. By ignoring such
correspondence, the problem will not go away – it will only get worse.
TTFN
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