Sunday, January 29, 2012, AM | Leave Comment
Many taxpayers would say they have never cheated on taxes. However, they would add the word “knowingly” they have not. I imagine to prove it otherwise would be extremely hard. The same thing happened to Treasury Secretary, Timothy Geithner, a couple of years ago, who said it was a mistake and everything is straightened out with Internal Revenue Service (IRS).
The thousands of UBS customers who were allegedly sold into illegal tax shelters, in 2009, can attest to that. The problem is, knowingly or unknowingly, it can occur all too easily.
The tax experts tell us the reason is the tax code being so complicated and convoluted that, in fact, it’s easy to make a mistake on your tax return. There is no way you can always know the law.
Of course, ignorance of the law is no excuse. If the IRS finds a mistake on your return,
- you will have to pay what you owe,
- will be subject to interest,
- and, possibly, penalties,
- the responsibility for unpaid tax is yours, even if a professional prepared your return.
There are things you can do to make sure you have reported all your income, proper deductions and paid all your taxes.
Report all your income
You do taxes yourself or get them done by a professional, you must report all your income. The professional will report your income on the forms whatever you tell them.
Any income that was paid out to you in return for your services provided to organizations is taxable. They have to include that income of yours as “expense” in their books. They get audited, for example, that income can be traced back to you.
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. If you paid taxes to the country where the income was earned, you may be able to claim a foreign tax credit.
Take the right deductions
People’s tendency is they will exaggerate and deduct anything and everything. For example,
IRS requires that filers provide receipts for all cash donations, even that $5 you gave to the Salvation Army bell ringer over the holidays.
Home Office Deduction
To deduct home office expenses, you need to use the space regularly and exclusively for business.
Meals and entertainment
You must produce the name of the restaurant, location, the amount paid, the person you were with and the business discussion that occurred. You must keep a record of these details in the following both circumstances.
- You must have a receipt for expenses of $75 or more.
- You don’t need a receipt for expenses under $75.
- Generally, 50% of the bill is tax-deductible.
Business Travel Expenses
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 – but never your personal expenses. If you use your car for business travel, you may deduct the costs associated with it, or take the standard mileage deduction. You need to keep a record.
Employment Taxes for Household Employees
If you paid your household employee more than $1,700 for 2009, 2010, and 2011, you are supposed to pay taxes – often called Nanny Tax. Also go over Household Employer’s Tax Guide. The IRS should receive a total of 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.
In a Nutshell
Many people go the extra mile to understate or overstate when it comes to paying taxes.
- When it comes to people’s income – cash or otherwise – they tend to understate and report less.
- When it comes to their expenses for deductions, they tend to overstate and report more.