It's hard not to cringe at the thought of a run-in with the IRS. But as Treasury Secretary Timothy Geithner and the thousands of UBS customers who were allegedly sold into illegal tax shelters can attest, those run-ins -- whether prompted by an intentional cheat or an unintentional mistake on your taxes -- can occur all too easily.
“Our tax code is so complicated and convoluted that, in fact, it’s easy to make a mistake on your tax return, just because you don’t know what the law is,” says Jeff Schnepper, a tax attorney in Cherry Hill, N.J.
Of course, ignorance is no excuse. If the IRS finds a mistake on your return you’ll not only have to pay what you owe, but will be subject to interest and, possibly, penalties. And the responsibility for unpaid tax is yours, even if a professional prepared your return.
No matter who does your taxes, here are three questions to ask before you sign on the dotted line.
Did you report all your income?
Earned some extra cash from freelancing? Just because you didn’t get a 1099 form (businesses aren’t required to issue those if they paid you less than $600 in 2008) doesn’t mean you’re off the hook. Granted, the IRS won’t know about that income — that is, unless they audit the company or person who paid you, says Fred Daily, a tax attorney in St. Pete Beach, Fla. “I’ve had clients get caught up in an audit that way,” he says.
And don't forget any income you earned abroad. “As a general rule, U.S. citizens are required to pay taxes on all of their income, regardless of where it was earned,” says Mark Luscombe, principal analyst for the tax and accounting group at CCH, a tax and business law information provider. If you paid taxes to the country where the income was earned, you may be able to claim a foreign tax credit. For more information, read our story.
Did you take the right deductions?
Deductions get many taxpayers into trouble. “People tend to be too generous in their estimates of deductions,” says William Raabe, a tax professor at Ohio State University. Here are the trickiest ones.
* Meals and entertainment: If you took a client out to dinner and discussed business immediately before, after or during your meal, then generally, 50% of the bill is tax-deductible. But you must have a receipt for expenses of $75 or more, containing the name of the restaurant, location, the amount paid, the person you were with and the business discussion that occurred. For expenses under $75, you don’t need a receipt, but you must keep a diary with all of the above details.
* Business Travel: If you traveled within the U.S. for business, you may deduct 100% of the cost of getting and staying there (airfare, rental car or taxi, hotel). Personal expenses —say, a ticket to a museum — are not deductible. For international travel, you must generally allocate expenses based on the business and personal part of your trip, Luscombe explains. For details, read our story.
If you use your car for business travel, you may deduct the costs associated with it, or take the standard mileage deduction. But you have to keep a diary, including the origin, destination, miles driven and the business purpose of the trip.
* Home office: Just because you do a little work in your home doesn’t mean you can take a home office deduction. In fact, most people don’t qualify for this deduction because they need to use the space regularly and exclusively for business, explains Schnepper. If you use the home-office computer fro personal matters, the home-office deduction is disallowed.
* Charitable donations: It used to be that up to $250 in contributions could be claimed as a deduction without a receipt. However, starting in 2008, the IRS requires that filers provide receipts for all cash donations, even that $5 you gave to the Salvation Army bell ringer over the holidays.
Did you pay taxes for a household employee?
If you paid that person more than $1,600 in 2008, you’re supposed to pay the so-called Nanny Tax. Come tax time, the IRS should receive 15.3% of that person’s annual wages in the form of Social Security and Medicare taxes. (Whether you decide to withhold half of that from your employee’s salary or pay that yourself is your choice.) Use our worksheet to determine the tax due.
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