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Preventing Tax Problems
How to audit-proof a tax return
- The audit-proofing techniques I have espoused in my books have been
used effectively to prevent audits, penalties and the wasting of precious
time you need to operate your business. The techniques are simple -- especially
in light of the fact the IRS produces a special audit-proofing form you
can use.
- Audit-proofing is based on the principle of providing with your return
the information relevant to a claim in your return. You provide information
for claims you think could raise a red flag and trigger an audit.
- Charitable contributions, mileage claims for a small business, unusually
high entertainment costs, the home office reduction or unusual medical
expenses are among those deductions that are highly scrutinized.
- By providing proof of suspected red-flag deductions with the return,
you in effect, eliminate the need for the return to be audited. Proof may
include copies of canceled checks, copies of receipts, or an affidavit
explaining how you arrived at certain deductions.
- Form 8275 is a form the IRS would rather you did not know about or
use. It is called the Disclosure Statement. When filed with the return,
it calls attention to a claim made and says "I claimed this based
on these specific grounds." It allows you to prove your claim without
going through an audit.
- By proving your case before an audit, you greatly reduce the need for
an audit, and the scope of an audit if there are other claims called into
question later. The IRS would rather not audit those who are informed and
prepared to respond to a challenge.
- Making full disclosure at the time you file your return can also provide
grounds for eliminating penalties if you should happen to make a mistake
in your calculations of a deduction. Form 8275 demonstrates good faith
and illustrates the reasonable cause for the action you took in making
the claim. These are the primary grounds for abating penalties if assessed
later.
- For more information on how to audit-proof your tax return, please
see my book The IRS Problem Solver.
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How to get an extension of
time to pay taxes
- Each year, approximately four million citizens are penalized for failing
to file a return on time or failing to pay the tax when a return is due.
Many of these penalties could be avoided if the IRS would just come clean
about one's right to request an extension of time to pay a tax.
- The extension of time to pay should not be confused with automatic
extensions of time to file a return. Form 4868 allows one to request an
automatic four month extension of time to file a return. However, this
form makes it clear that the tax owed at the time of filing must be paid.
Failure to do so will result in penalty.
- Form 2688 allows an additional two month extension of time to file
if you can show a specific reason why more time is need. Again, the tax
must be paid in order to avoid being penalized for late payment. Whatever
your reason for requesting this additional two month extension, you should
always include as one reason your desire to file a complete and accurate
return.
- Form 1127, however, is quite a different animal. It is entitled, Application
for Extension Of Time To Pay Taxes. It is important to note that this is
not an automatic extension. It is an application for an extension. In order
to have your application accepted, one must show undue hardship. Medical
reasons, natural disasters or a death in the family are among those hardships
that may be recognized by the IRS.
- When an application is accepted, the taxpayer is given up to six months
to pay the tax free from penalty. Interest, however, accrues from the time
the tax was due. Use of Form 1127 and tips on how to make a successful
application can be found in my book The IRS
Problem Solver.
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