Save Money Want to strike fear in people’s hearts? Just mention the IRS! It’s one of the most misunderstood government agencies. Our taxes support government operations, and social programs. Indeed without income taxes our health, education, national security and public welfare would be severely compromised or fail. Income taxes are the largest source of federal income and through transfers are a significant supplement to states, counties and municipalities. According to the US Government, income taxes represent approximately one third of all tax revenues collected in United States in 2010. Taxes affect many different aspects of business, government, personal and political decisions. A solid understanding of tax functions is fundamental and extremely useful for taxpayers. It’s important to pay your taxes, but it’s even more important to not pay too much.
Save Money A Tale of Three Accountants
Once upon a time there were 3 accountants. Each was successful and ethical. Our hero, John Taxpayer goes to the first one, and the result is he owes $1,000. He decides to get a second opinion, and the result is a $500 overpayment. His friend recommends yet another tax preparer, and the outcome is a $2,500 refund. How can this happen? The answer is, it happens every day, although the taxpayer doesn’t have the benefit of comparison, because he will typically go to one accountant and not know if his return was filed accurately, and to his benefit. In our example, each return was legally prepared and fully in compliance with the tax code.
Who cares about taxes?
Every taxpayer should care about taxes because they influence everyday decisions including all kinds of investments, estate planning, educational commitments, amount and timing of expenses and even prospective job offers. Moreover, the role of taxes is not only limited to personal financial decisions; taxes play an extremely important role in business world. For example: if the taxpayer considers opening a business. The organizational form of the business should be decided at least partially, on the tax implications, because taxes represent significant transaction costs and can have a considerable impact on reported profits. Individuals and businesses should factor potential tax implications into their individual and business economic and financial decision-making processes. Decisions should consider costs and benefits from tax strategy and tax implementation in everyday life or the business cycle.
Complicated Laws and Rules
The tax codes are intentionally complicate. This is the result of congressional actions to benefit certain categories of individuals and businesses. The tax laws reflect a patchwork of special interests; they’re more political than business-like or fair. Your task is to use every exemption, deduction, and rule to your advantage so that you will minimize your tax liability. The government’s job is to make sure you comply with the law and pay your “fair share.” Every taxpayer should be aware that tax laws in United States are based on the all-inclusive income concept. The all-inclusive income concept means that every taxpayer is obligated to include as taxable income all realized income from whatever source, and then claim applicable treatment/adjustment/exemptions/preferences.
Civil Penalties Imposed for Tax Violation
The most common tax penalties are the civil tax penalties and they are the result of violating the tax statutes. Unfortunately, non-compliant taxpayers will be subject to penalties, and in most cases, have to pay interest Save Money on the underpayment. However, it is important to remember that the taxpayer will not be a subject to an underpayment penalty if there is a substantial authority that can support the taxpayer’s position. The most common civil violations are: failure to file the tax return, failure to pay tax owed, understatement of tax, fraud, failure to pay estimated payments and claiming false withholding information.
Preparing Your Taxes and Selecting a Tax Preparer
The best way to reduce the taxes you pay is to engage in tax planning, keep accurate records, and perhaps most importantly select a qualified, knowledgeable accountant who will work hard to minimize your tax liability. Unless your tax situation is very uncomplicated it will generally be to your financial advantage to hire a professional tax preparer. Few people are capable of doing themselves justice when it comes to tax preparation. And the seasonal store-front tax-preparer may not be that much better. Unfortunately there are many unqualified tax preparers in United States, and they frequently make mistakes in preparing taxpayer returns. The most common errors made by tax practitioners result in understatement of tax. Remember that tax practitioners are not liable for the additional tax due from the taxpayer. And, only occasionally can the practitioner be held legally responsible for some related penalties and Save Money taxes.
Here are some tips:
–Get recommendations for an accountant/tax preparer from your friends, and respect colleagues.
–Exercise a similar level of care in selecting your accountant/tax preparer as you would in selecting a doctor or minister.
–Registered (with IRS) Tax Preparers, CPA’s and Enrolled Agents are typically well-qualified and have demonstrated their competency.
–Keep receipts, bank statements, mortgage and tax records, any professional or business expenses, etc., so that you will be prepare to file your return.
–Organize your records to facilitate preparation of tax forms. Deductions can be overlooked or understate as a result of messy or incomplete information.
–Be sure to accurately report all of your income. Tax evasion is a serious offense. (And failure to report all of your income is even worse than overstating deductions.)
–Be sure to have an in-depth conversation with your tax preparer. They will ask you about all your financial matters to ensure that you are getting every deduction and favorable treatment you are entitle to.
— Ask your tax preparer if you qualified for following tax credits: child tax credit, dependent care credit, earned income credit, education credit, foreign tax credit, making work pay credit, and refundable tax credit.
— Past and future income and projected expenses are equally as important as the current year when you’re developing tax strategies. View tax-preparation as an ongoing, year-round process, not a single event.
–The fee you pay to your preparer is not as important as the net result. (Amount owed or refund minus the fee.)
–Either file by the deadline or file for an extension so that you don’t incur penalties.
–You sign your tax return and you are responsible for the content.
Krzysztof Bryniuk, MBA, MM, MEd, has over 7 years of experience in finance, marketing, banking, and accounting. He is a Professor of Accounting, Finance, and Economics. His firm, Bryniuk & Co., LLC specializes in individual and corporate accounting services. Save Money