It costs taxpayers more money to resolve tax problems. Many taxpayers are currently receiving notices of tax due or notices of intent to levy or to seize their properties from the Internal Revenue Service. This unfortunate outcome could, most of the time, be avoided when taxpayers take the necessary steps to ensure that their tax return are accurately filed. Taxpayers should ensure that they have the documentation available to prove their deductions. The documentation should be kept for as long as necessary to comply with tax laws administration.

  • Taxpayers must keep records of repairs that affect the basis of their home because the records would be needed when the home is sold to calculate the gain from the sale and the tax liability that might result.
  • Taxpayers who are self-employed or business owners must have separate bank account for their business. They also must have and keep copy of their profit and loss (P&L) statements.
  • Taxpayers who are claiming deductions for their car expenses must have adequate records of mileage driven, purpose of the drive, repairs receipts, and other receipts to substantiate the deductions.
  • Taxpayers who are claiming rental loss must have proof of rental income, copy of lease agreement, receipts of taxes paid, total number of days the property was rented, evidence of ownership, and any other documents that would substantiate expenses and deductions claimed. When claiming management fee, the copy of the contract and payments made must be available.
  • Taxpayers claiming medical expenses must have receipts of payments, cancelled checks. For prescription drugs, a copy of the prescription must be kept, cost and date of purchase must be available.
  • Taxpayers who are business owners must keep adequate records to prove their business income and expenses. They must ensure that the information provided to the tax preparer is included in the return as provided and ask questions when a piece of information is not included. They should look for inflated expenses and any unknown information that might be included in the return.
  • Many taxpayers who did not receive income from self employment have a schedule C or A attached to their Form 1040 that causes in some cases an understatement of tax liability and in other cases an overstatement of refund. There are instances where the schedule C is used to increase the taxpayers income and thus illegally increase their earned income credit (EIC).
  • Some tax preparers also added fictitious mortgage payments and charitable contributions on Schedule A to lower clients tax liabilities.
  • Taxpayers who did not attend an eligible educational institution should ensure that there is no education credit on their return.
  • Taxpayers should see it as a red flag and ask questions when they are promised a larger refund than that they usually receive when there were no drastic changes in their financial situation during the tax year.

The Internal Revenue Service and the Department of Justice are prosecuting some tax preparers more than ever before. However, the taxpayers who benefited from their misdeeds are still liable to repay the money to the Treasury.

The status of limitations is generally 3 years, 6 years, or no statute of limitations depending on the severity of the case, like fraud. Once a tax liability is timely assessed, the IRS has 10 years to collect the tax debt. Do not disregard any correspondence from the Internal Revenue Service.

An accuracy-related penalty is imposed under IRC section 6662. Per this section, a penalty of 20% of unpaid tax may be due if the tax is underpaid due to: 1) Negligence or disregard of the rules or regulations, or 2) Substantial understatement of income tax. The understatement is substantial if it is more than the largest of 10% (5% if the taxpayer claims section 199A deduction) of the correct tax or $5,000). In certain cases, the accuracy related penalty could be 40%.

It is recommended that taxpayers review their tax return to find out if it is accurately prepared. Before signing your tax return, at least review: line 1 (Wages), line 7a (Other income), line 9 (Standard or itemized deductions) and line 20 (Refund). Ask questions!

Generally, you could amend your tax return within 3 years after the date you timely filed your original return or within 2 years after the date you paid the tax, whichever is later.

For Further reading: IRC sections 6662, 6601, Treas. Reg. sec. 1.6662.

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