Tax Time Looms And You Have The Power To File With Ease

This article will focus on how to prepare your business and personal tax returns once tax time actually arrives. Issues discussed will include how to efficiently file your tax returns, how to avoid audit triggers and important filing issues. If you stayed organized throughout the year, tax time should be a breeze. Do not panic if you were less than diligent with your record keeping and organization: just make it a point to change your habits this year.

Make sure you have all of your documents

Gather all relevant information including reporting documents, bank/brokerage statements and available deductions. Review your prior year tax returns to make sure you have all of the documents that you had in the past and may have overlooked. This step is important to save time and to ensure that you do not have to file an amended return with information you forgot the first time. A complimentary checklist of common items you need to include on your tax return is available on our website: www.bergersontax.com, under the Income Tax Organizer tab.

Separate your expenses into categories

As a real estate professional you assuredly have many expenses from operating your business. It is very important that you do not lump all of your expenses together. but rather separate them into different categories. If you use accounting software you will be able to print out a statement that has your expenses broken down into different categories already. You will find if you have folders for each category of expense and separate and ledger your receipts throughout the year, you will save yourself time when you go to file your taxes.

If you just threw all of your receipts in a box, you will need to categorize your
expenses now. As an example of how to categorize your expenses, look at the chart titled "Deductible Business Expense Worksheet". By having your expenses separated into different categories you can easily transpose your numbers onto the tax return. If you hire a tax professional you will make his or her job easier and save money on tax preparation fees.

File on time

No matter what type of business return you are required to file, make sure to file by the appropriate deadline. April 15th is the deadline for filling your individual income tax return, unless it is pushed back a day or two as it has been in recent years. Your return is considered filed timely if the envelope is properly addressed and postmarked no later than April 15. If you use a fiscal year (which is a year ending on the last day of any month other than December), your return is due on or before the 15th day of the fourth month after the close of your fiscal year.

If you cannot file by the due date of your return, then you can request an extension of time to rile. However, an extension of time to file is not an extension of time to pay. You will owe interest on any past-due tax and you may be subject to a late-payment penalty if payment is not made timely. To receive an automatic 6-month extension of time to file your return, file Form 4868 by the due date of your rerum.

Do not include items on your tax return that will raise RED FLAGS

When preparing your tax return it is important to avoid including any items that might draw extra attention to your return. Below are a few items I have found attract extra attention from the IRS. A complete list of audit triggers can be found in The Audit Angel 2009: Income Tax Organizer and Mileage log available at www.bergersontax.com.

Unusually high itemized deductions

If you claim large deductions for someone in your income category the IRS might decide to examine your return. Do not be afraid to claim all of your deductions if they are legitimate, just be able to validate them. If you are interested, take a look at the IRS statistics from Income Bulletin, Spring 2008 News Release IR·2008-720of average deductions claimed for income categories. Compare your itemized deductions with the national average to see if your deductions would be considered high.

Losses from self-employment

As a real estate professional you most likely are considered self-employed and have to file a tax return for your business. The IRS audit rates are already higher for taxpayers who are self-employed, but the item that really raises RED FLAGS is if an individual claims losses from their self-employment year after year. When claiming losses every year the IRS wonders if you have a legitimate business and are making a real attempt to make a profit or if you are participating as a hobby.

Under the "hobby loss" rules you can deduct expenses only to the extent of income from the activity. In my experience, I have generally found the IRS starts questioning if a profit is not achieved between three to five years. As a self-employed individual myself, I know how difficult it is to achieve a profit, especially in the first several years of business.

If you do not earn a profit for many years, make sure you can show you are attempting to have a successful business and have a legitimate motive to make a profit. Things you can do to demonstrate that include: having a business plan, setting up a business account at a bank or having a business credit card, having a registered name, produce marketing materials and having a completed mileage log with appointments or meetings.

Do not report all round numbers

You might laugh at this one, but I assure you individuals do it all the time. Although you are required to round off your income and deductions to the nearest dollar. do not report everything rounded to the nearest zero. When all of your deductions are $50, $100, $1,000, it appears to the IRS that you are guesstimating your figures and not reporting the actual amounts. Actually several years back I had a client bring me his Deductible Business Expenses Worksheet filled out with all numbers rounded to the nearest hundred. Needless to say, I sent him back home to find the exact figures and thus solved him an unpleasant meeting with the IRS.

Get good advice

It is very important that you have a tax professional to consult throughout the year and to help you complete your income tax return at year end. Keep in mind when I say a tax professional I mean someone who is qualified, has ample experience, and is willing to speak with you personally to explore your individual tax situation to best maximize your deductions. The main reason to hire a tax professional is that chances are you do not keep up with current tax law.

Congress is constantly passing new laws, the IRS comes out with new rulings and judges make new decisions all the time, all of which directly affect your tax situation. How many of you have the ability to read about all these decisions in the newspaper as well as research them thoroughly to see how they affect your individual tax situation? Tax professionals subscribe to newsletters, press release and alert services that keep them abreast of every changing tax law. In addition, tax professionals attend tax education courses throughout the year and learn about changes from IRS agents and state officials.

Keep tax returns and records for at least three years

Your tax return and records should be kept for at least three years: since the IRS generally has three years from the date your return is filed to audit your return. Keep in mind, however, the IRS can go back as far as six years to question a return where income has not been reported or indefinitely where fraud is suspected. Records of transaction relating to the basis of property should be kept for as long as they are important in figuring the basis of the original or replacement property.

An example would be keeping records of the purchase of rental property or capital improvements to that property for as long as you own the property. The keys to a smooth income tax filing are to make sure you have all the correct documents, categorize your expenses, avoid audit triggers, file on time, and get good advice. If you follow the steps in this article and prepare properly throughout the year, your income tax preparation experience should be painless.

If you have not been very organized in the past, make it your New Year's resolution to start keeping detailed records of your business expenses. You will likely find that you have more deductions than you thought and you will also be protected in the case of an audit. The more organized you stay throughout the year the easier tax time will be.