Taxpayers should ensure that they have and produce all their required tax documents when filing their tax return. Taxpayers should have an open discussion with their tax preparers before filing their tax return to ensure that all relevant documents are produced to show income and claim legal deductions.
A tax preparer is hired to prepare the tax return of the clients. The said preparer could not legally promise a taxpayer a lot of money or big refund. The preparer could not promise a specific amount of earned income tax credit (EITC) because each taxpayer financial situation is different. Alimony, unemployment compensation, child support payments cannot be used to increase the EITC because these payments are not earned income. The preparer should apply the tax laws to each taxpayer’s case. The taxpayer should request an explanation as to how the preparer gets to the refund amount before signing the tax return, especially when the taxpayer’s financial situation remained unchanged and no prior history of high refund. Taxpayers must inquire about any questionable amount in the return.
The fee that taxpayers pay to prepare the tax return should be based on the amount of work, time, complexity, the number of schedules and forms that the return requires, and the education and experience of the tax preparer. It is against the rule of IRS circular 230 section 10.27 for tax preparers to charge a contingent fee based on the amount of a taxpayer’s refund amount.
- Getting a big refund does not necessarily mean that your tax return is legally and accurately filed. You are personally liable for everything on your tax return. If you are married, you are jointly and severally liable for any information on your joint return. If you have more than one statement of income, (W2s, K1s, 1099s, etc.), make sure that all items of income are accounted for.
- Make sure your return is filed with the correct filing status – Single, Head of Household, Married Filing Jointly, and Married Filing Separately. Your filing status determines your standard deduction and affects your credits.
- Make sure there is not a Schedule C attached to your return if you did not receive payments from other sources as a self employed or a contractor. Each tax year many taxpayers are audited because a Schedule C was attached to their Form 1040 to either increase their taxable income or to lower their taxable income to qualify for more earned income tax credit or to lower their tax liability.
- Take some time to review line 1 (Income), line 8 (Other Income), line 12 (Standard deduction or itemized deductions), line 15 (Taxable Income), lines 34-36 (Refund). Ask questions! This exercise could save many taxpayers a lot of money and could protect them from audit!
- Make sure the tax return preparer information and signature are at the lower bottom of the second page of Form 1040 because you could not attempt to hold the preparer liable in the case of an audit if he or she did not sign the return.
- Don’t inflate your expenses on your tax return as a business owner. Reporting consecutive big losses or expenses are red flags. Inflated expenses could trigger an audit by the IRS. They could certainly disqualify you for a mortgage, a line of credit, or in cases you have to show proof of income for certain transactions.
- Ensure that you file the proper tax forms for yourself or your business. Give a copy of the notice you received from the IRS when you applied for the Employer Identification Number (EIN) to the tax preparer, mainly when you are filing the first return. Partnerships and S Corporations returns are due on March 15; Schedule C and Corporations returns are due on April 15.
- Making the maximum contribution in a qualified retirement plan reduces your taxable income. Self employed and small businesses are qualified for higher contribution. Taxpayers could contribute to their IRA account until the filing deadline for their tax return, including extension.
- A self employed taxpayer or business owner who did not pay quarterly estimated tax might owe a penalty.
Many taxpayers do not realize that the IRS charges a penalty up to 25% just for filing a tax return late. Taxpayers could get hit with an additional 25% of what they owe if they miss the deadline for filing individual tax returns, payroll tax returns or corporate tax returns. We have seen so many taxpayers who could have saved thousand of dollars on penalties if they just knew this one thing. In the future, no matter what is going on in your life, file all tax returns on time even if you do not send in the money owed with the return. You will get an unpleasant letter from the IRS for not sending in the money owed. However, you have avoided a 25% penalty.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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