Want to Keep the IRS Agents Away?

Every consumer has heard the horror stories of time consuming audits and excessive penalties or fees being assessed, but the simple fact of the matter is that there is an incredibly simple way to avoid IRS problems. Contrary to popular belief, the Internal Revenue Service does not place an emphasis on singling out honest individuals and ensuring that they are paying as much income tax as possible. As long as an individual follows a few basic tips, dealing with the government does not have to be a painful ordeal.

Wise individuals will keep all of their receipts and other tax documents neatly organized, and this will certainly prove to facilitate filing taxes in a timely fashion. Missing receipts can cost a taxpayer thousands of dollars in unnecessary taxes. A misplaced 1099 or income statement will cause the reported figures to differ from the records that the IRS is receiving from vendors or employers, and many of these issues will ultimately end in an audit. Ignorance is certainly not a valid excuse for making careless mistakes, and having documents organized and gathered in one particular place will help the process go much smoother. Consumers should always prepare for the possibility of an audit, and an auditor is going to be very appreciative of an individual that maintains appropriate records that can easily be produced.

Preparing and filing taxes does not have to be difficult, but many consumers will procrastinate until the last possible minute or file countless extensions. All documents should be filed in a timely fashion in order to minimize the chances of being selected for an audit. Repeatedly filing for an extension can be perceived as a red flag and trigger unwanted attention from the IRS. Whether an individual needs to seek professional assistance or can perform the task without additional help, complying with all of the deadlines will help avoid many IRS problems. It is important to understand that a tax return must be filed every single year, and a person must ensure that they keep adequate records of each filing.

Many consumers are concerned that if they are unable to immediately pay any amounts owed to the IRS, they will be subjected to criminal charges and face other similarly scary situations. In reality, payment arrangements and other options are available to taxpayers that need assistance. The majority of IRS problems originate from misunderstandings and failing to file taxes on time, so a wise consumer will make sure that they have all of their paperwork prepared and filed before the deadline.

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Tax Tips for Small Business Owners

For most Americans, the idea of owning their own business means taking control of their finances and attaining a sense of accomplishment, as well as a valuable legacy that can be passed on to their families. The work involved in starting and maintaining a small business requires the kind of passion and commitment to detail that comes from a desire to map out your own future, and there are problems that can arise. Because most small businesses don’t make a profit in their first year, it’s important to pay close attention to tax laws when reporting your earnings to the Internal Revenue Service (IRS). Establishing a good track record with the IRS from the beginning is a way to ensure that your earnings remain penalty free and can be reinvested into your future.

The most obvious oversight also turns out to be the most common. Failure to withhold income taxes for your employees can result in what is called a 100 percent Payroll Penalty, meaning the IRS will pro rate the entire amount owed and hold not only the business owner accountable, but everyone with check signing or accounting privileges.

While all small businesses are entitled to write off operating expenses, misrepresenting yourself by making unauthorized deductions can cause IRS problems in the form of penalties and interest fees. You should be prepared to prove all business deductions made on your tax return and keep your write-offs within a reasonable range. Excessive deductions are a red flag that could provoke an audit and result in small business tax problems.

In an effort to maintain productivity, small businesses sometimes turn to contract workers to temporarily add to their labor force, and can legally avoid withholding taxes. However, classifying permanent employees as independent contractors in a effort to avoid a tax responsibility is a major mistake, and the IRS imposes steep penalties for each infraction. Federal form 22-8 “Determination of Employee Work Status for Purposes of Federal Income Tax Withholding” provides clear distinctions between permanent and contracted employees.

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Common Attorney Tax Issues

Attorneys experience many of the same tax problems faced by anyone who is self-employed. At the end of the year, anyone operating a sole proprietorship is required to file their business’s financial information on Schedule C to the IRS along with form 1040. They will then be taxed on profits made in the practice, minus any business expenses.

It should be noted that they will be taxed on all profits made by the business during the year. Even if they were to leave money in the bank under the name of the business or sole proprietorship, they will be taxed for the profit. Hence, it is imperative for any practicing lawyer to keep personal expenses separate from business expenses. A good method of doing this is to keep a separate checkbook for business and personal use. This helps to lessen the possibility of attorney tax problems.

It is the responsibility of lawyers to withhold their estimated taxes throughout the course of the year. Since self-employed attorneys do not have a company withholding income taxes for them, it is their responsibility to do so. To do this properly, they must estimate the amount of taxes they will owe at the end of the year and pay estimated quarterly payments to the IRS and state tax agency.

Self-employed individuals are also required to pay self-employment taxes to the IRS. Self-employment taxes are comprised of social security and Medicare taxes. These taxes are the same as a payroll tax that is taken care of by a large business. A difference in payroll taxes between a sole proprietorship and an employee on a company payroll is that a self-employed person is required to pay twice as much as an employee of a company. When an employee pays his or her Medicare or social security taxes, it is matched by their employer. Since a self-employed lawyer does not work for a company, it is their responsibility to pay the entire share of the tax.

It is very important for any lawyer operating a sole proprietorship to stay on top of their estimated tax amounts and make the quarterly payments on time. There is nothing worse than forgetting to withhold money for taxes and having the IRS knocking on your door. Be diligent, and follow best practices to avoid facing any IRS problems.

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Tax Issues for Pastors

Pastors receive tax advantages, such as exclusion of the value of housing provided by the employer if it relates to the ministry. Other taxpayers must declare the market value of the housing as income. Another advantage is the allowed deduction of real estate mortgage interest and real estate taxes on their home, which other homeowners are not so privileged. Beyond these advantages, a pastor can face tax problems that other individuals rarely experience.

There are three tax issues which may be a problem for pastors if not addressed properly. The first issue involves their employment status: independent contractor or employee. The second issue is proving the minister meets the criteria declared by IRS Section 107. The third issue addresses the declaration of gifts to the minister as taxable income.

Independent Contractor or Employee

Independent Contractor: The payer does not withhold income taxes, social security, Medicare, or other amounts required to be withheld from the minister’s salary. The payer issues a 1099 to the payee, the minister.

Employee: The payer withholds income taxes, social security, Medicare, and other amounts required and issues the payee W-2.

Minister According to IRS Section 107

IRS Section 107 states the individual must be an ordained minister performing traditional duties such as conducting religious activities, administering religious organizations, and/or teaching and administrative duties at theological seminaries.

Gift or Income

Income, according to the IRS, includes fees for services such as marriages and funerals, including any cash bonuses. The IRS considers the intent of a gift by the donating party to the pastor. IRS Publication 525, Taxable and Non-Taxable Income-Special Rules for Clergy, has important information to clarify this issue.

For more information, consult a certified tax professional or the IRS for clarification of issues and questions.

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