Income Taxes 101

If you owe the IRS money, but can't afford to pay it, there are ways to get square with the government. The IRS will work with you to rectify the situation, as long as you're honest with them, and hold up your end of the bargain. The IRS views people who are unable to pay their taxes differently from those who intentionally evade paying. If you're unable to pay, you won't go to jail, but if you evade paying, you might. It's estimated that over 20 million Americans owe back taxes. That means you're not alone, and it also means there aren't enough jail cells for those who can't pay.

While there are things you can do to help yourself, there is one thing that will definitely hurt you. Whether you owe for the current tax year, or past years, the worst thing you can do is ignore the problem, or ignore the IRS. Ignoring the problem will not work. The IRS will not forget you owe them money, and unlike a fine wine, tax problems don't age well.

If you've just prepared your tax returns and discovered you owe more than you thought, and you can't afford to pay, file your tax returns any way. Not filing will add more penalties to your tab, and could lead the IRS to believe you're not acting in good faith. The first option available to you is an installment plan. If you owe less than $25,000, and have the ability to repay the debt within 5 years, this might be your best choice. To submit an Installment Agreement Request, you'll need to complete IRS form 9465, and send it to the IRS for approval. If your installment plan is accepted, you will pay interest on the debt, but the rates are quite reasonable. If you have the ability to repay the debt within 1 year, your installment request will almost certainly be accepted. Installment requests lasting more than a year will receive more IRS scrutiny.

If an installment plan isn't going to work for you, the next option is to request an offer in compromise. An offer in compromise will allow you to settle your tax debt with the IRS for an amount less than you owe. To apply for an offer in compromise, you'll need to submit a copy of IRS form 656. The IRS states that this program is designed for taxpayers who are in extreme circumstances, and is not an invitation to avoid paying taxes. If you have a good history of filing and paying your taxes, and you can prove that paying the entire amount you owe would create an economic hardship, your request might be accepted.

Remember, the IRS is willing to settle your tax debt, if you're willing to work with them. Communication and honesty will be the keys to your success. There are services out there that will help you in your quest to settle your taxes. The cost of this service varies depending upon which service you use, and how much you owe. A good rule of thumb is you can expect to pay $1,500 for the help.

However, the entire process is something that you can do yourself, if you know what you're doing. For only $47 you can buy a step-by-step manual detailing how to settle your own tax debt. The manual is written in a plain, easy to understand fashion, so that you will take the right steps from start to finish. In many cases, you can use the $1,500 you saved by doing it yourself to settle your tax debt! To get your copy, and start on the path to tax debt freedom, click on the following link: Settle Your Own Tax Debt!.

If you're like me, you've seen the ads offering free online tax preparation, and thought, "What's the catch?" Is this a phishing scam, or some other type of identity theft rip-off? After doing some research, the answer is no. This is a legitimate service. So, if now you're wondering, "OK, then how do they make money?" The answer is the free tax preparation service is only free if your Adjusted Gross Income (which is your income after you've taken your deductions) is under $56,000. If your AGI is $56,001 or higher, there's a fee to file which is typically $10 and up. Additionally, the 'free' service is only for your Federal tax return. If you want to file your state tax return, you will also incur a fee of $10 and up for that service.

Even though this is a legitimate service, there are a few things you should do to protect yourself from scams. First of all, make sure the company you use is and authorized IRS e-file provider. Secondly, make sure they use an encrypted SSL server to transmit your personal information. Finally, make sure their privacy policy states that they won't share your information with anybody other than the IRS. If the service you choose is legit, all this information will appear on their home page.

Free online tax filing services offer many benefits, such as:

· Simple and fast tax filing
· No software to download, so you can use any computer that has an internet connection
· No risk of calculation errors or illegible tax returns (which are issues that might get you audited)
· Less expensive, and easier to use than software
· Faster tax refunds, and the option of direct deposit
· If you owe money, you can file now, and send the check later
· Safer and more secure than sending your tax returns through the mail

The downside is, for most people, filing your taxes won't actually be free. However, you can feel confident that free internet tax filing is a legitimate service you can trust.

In order to minimize your tax bill and maximize your tax refund, you need to make sure to take advantage of every deduction and credit you're entitled to. To make this a little easier for you, we've highlighted 5 deductions that most taxpayers are entitled to take, but often overlook when filing their tax returns.

State Sales Tax
This deduction is especially important for those who live in states that don't have a state income tax, but in certain cases, can also work to the benefit of taxpayers who are required to pay state income tax. Either way, you must choose between deducting state and local income taxes, or state and local sales taxes.

If you made a large purchase such as a car, boat, airplane, or RV, you get to add the state sales tax you paid to the amount shown in IRS tables for your state. The IRS has a calculator on its web site to help you figure the deduction, which varies by your state and income level. If you use tax preparation software, or an online tax preparation service, they will usually be able to calculate this for you.

Out-of-Pocket Charitable Contributions
You can write off out-of-pocket costs incurred while helping charitable organizations. Some examples are ingredients purchased to prepare a meal for a church or a nonprofit organization's soup kitchen, or the cost of stamps bought for your school's fundraiser. Also, if you drove your car for charitable purposes, you can deduct 14 cents per mile off your taxes.

Child Care Credit
It's easy to overlook a portion of the child-care credit if you pay your child-care bills through a reimbursement account at work. Only $5,000 of such expenses can be paid through a tax favored reimbursement account, but up to $6,000 for the care of two or more children can qualify for the credit. So, if you run the maximum through a plan at work, but spend even more for work related childcare, you can claim the tax credit on an additional $1,000.

State Taxes Paid Last April
If you owed tax when you filed your 2008 state tax return, remember to include that amount with your state tax deduction on your 2009 return, along with state income taxes withheld from your paychecks or paid in quarterly estimated payments.

Property Tax Deduction for Non-Itemizers
Normally, to write off property taxes, you must itemize your deductions. But for 2009, homeowners who claim the standard deduction can also use property taxes to lower their income tax bill. If you don't itemize, you can increase your standard deduction by $500 if you're single, or $1,000 if you're married, to account for property taxes you paid on your home in '09.

If you've put off filing your taxes until it's too late to get it done on time, or if your tax returns are going to be a bit more complicated than you thought, you have the right to ask the IRS for an extension to file. The extension, once approved, will give you an additional 6 months to file your tax returns. That gives you until October 15th to file your taxes as an individual, or sole proprietor. For corporate returns, the extension lasts until September 15th.

In order to get your extension, you need to file IRS form 4868. To complete the form, you'll need to estimate the amount of refund you expect to receive, or the amount of taxes you expect to owe. The amount that you expect to owe is still due by April 15th (March 15th for businesses). The extension is only an extension to file your tax returns, not an extension to pay your taxes. If you are not able to pay on time, you can expect to be charged a penalty of about 0.5% per month. So, if you owe $5,000, it'll cost around $250/mo in penalties.

The form itself is fairly easy to complete, other than estimating your taxes. There are online services available that make the whole process much easier by asking a few basic questions, and running your numbers through a tax estimator. Another option is to use last year's return to estimate your current tax obligation. Remember, this is only an estimation of taxes owed, but if your numbers are way off, you could end up owing the IRS interest and penalties.

The IRS will let you know, within a few days, whether your extension was granted, or denied. Very few extension requests are denied (the IRS even refers to it as an automatic extension to file). If you are denied, it's usually because of an error in filling out the form. If that's the case, you can re-submit a corrected form. If your extension is granted, you're not obligated to use it, so filing for an extension can be used as a safety net, just in case you don't get your return in by the deadline.

In these times of a struggling economy, massive Government spending, and a skyrocketing national deficit, you can be sure that the IRS will work hard to collect every penny of taxes they're owed. The IRS estimates that the gap between what is owed by taxpayers, and what the IRS collects each year, is in the neighborhood of $400 billion. This could lead to higher scrutiny of individual tax returns, and an increasing number of IRS audits.

The IRS keeps their criteria for auditing tax returns a closely guarded secret, but there are a few things that clearly increase the odds of having to explain yourself to the taxman.

Having a High Level of Income
It's a problem most Americans would love to have, but earning a 6-figure salary increases your odds of catching unwanted attention from the auditors. There seems to be two reasons for this. First of all, the more you earn, the more valuable your tax reporting error is to the Government. After all, and error of a few hundred dollars is much less interesting than and error of tens of thousands of dollars. Secondly, higher income earners tend to own businesses, rental properties, investment portfolios, and other items that create a more complicated tax return. The more complicated the return, the bigger chance of a mistake.

While having a high level of taxable income sends up a red flag, most folks will gladly take their chances with this one.

Home Office Deductions
If you own a home-based business as either your primary source of income, or a supplement to your regular salary, tread carefully when taking home office tax deductions. You're well within your rights to take self-employment deductions, but make sure every deduction you claim is both legitimate and documented, because this will increase your odds of being audited. Resist any temptation to squeeze in a few personal expenses, and if you write off a percentage of your home expenses as business square footage, be conservative, be well documented, and be ready to answer questions.

High Level of Charitable Donations
The rules of thumb used to say that you could deduct $500 for charity without any documentation, and not worry. This no longer holds true. The IRS requires that all charitable donations be accompanied by written verification from either the charity, or your bank. If you donate more than 10% of your income, you should be commended for your generosity, but you should also be ready to prove it to an auditor.

Another important note for charitable contributions is that if you're making a non-cash donation of property (such as a car) and the value is over $5,000, you're required to have an appraisal done on the property to back-up your tax claim.

Unusually High Expenses
Steep expenses are another factor that will send a tax return under the magnifying glass of an auditor. If anything seems excessive, the IRS will take a closer look. If you have unusual expenses, such as very high medical bills, it's always a good idea to send an explanation along with your return.

Filing a Sloppy Return
A carelessly filed return that is either incomplete or hard to read will invite extra attention. An organized return prepared through e-file eliminates the possibility that a number is illegible, and tax preparation software reminds you to fill in each box, and checks for errors. The IRS feels that messy tax returns are more likely to contain errors. Even a simple oversight means that an auditor has to examine the return in order to correct the mistake. Don't overlook the details. Be neat, and be precise. Also, make sure you sign your return. If you fail to sign it, the IRS will take a closer look.

As long as you report all of your income, have proper documentation to prove your deductions, fill out your forms correctly, and calculate your taxes correctly; you don't need to fear an audit. However, it's still a good idea to avoid sending any red flags to the IRS.

Speaking of unusually large tax deductions....
An exotic dancer, who goes by the stage name of "Chesty Love", chose to get breast implants in an effort to 'enhance' her earning power. However, Ms Love was audited by the IRS after she listed the cost of her new 56 FFs as a business expense on her tax return. Rather than cave into the auditors, Chesty fought for her rights in tax court. The judge (who incidentally was female) allowed the write off, equating her new 'assets' to stage props.