As you get ready to file taxes for this year, make sure that you do it right. The worst group in America to mess with is the IRS. They have unprecedented power to pursue those in violation of their regulations and can make your life miserable if they catch you breaking the law. Many tax payers are not aware that there are quite a few businesses that take advantage of unwitting tax payers every year at tax time. So, to prepare for this problem, we have put together a list of the top ten tax scams that you should watch out for if some other party prepares your taxes.
Tax Scam #1: Bad tax preparers -- Some tax preparation services will charge you higher fees than you should expect to pay, and may even take a percentage of your tax refund. Also, in order to get your business, some companies will promise returns that are too good to be true. Watch out for deals that don't seem to make sense, and try to work with a company that has a good reputation.
Tax Scam #2: Hiding money in off-shore accounts --If your banker or tax preparation person tries to persuade you to do anything that hides your money from the IRS, don't do it. The IRS is making more efforts every year to chase down money around the world, and the penalties are getting quite severe.
Tax Scam #3: Phishing -- There are companies out there who will try to suck you in by promising you a large refund in an email, fax or even a phone call. They then get you to release personal information so they can steal your identity. If you get one of these emails, do not reply or click on anything.
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Are You an Unwitting Tax Cheat?
Did You Take the Right Charitable Donations Deductions?
It used to be that up to $250 in contributions could be claimed as a deduction without a receipt. However, starting in 2008, the IRS requires that filers provide receipts for all cash donations, even that $5 you gave to the Salvation Army bell ringer over the holidays.
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Are You an Unwitting Tax Cheat?
Did You Take the Right Charitable Donations Deductions?
It used to be that up to $250 in contributions could be claimed as a deduction without a receipt. However, starting in 2008, the IRS requires that filers provide receipts for all cash donations, even that $5 you gave to the Salvation Army bell ringer over the holidays.
Are You an Unwitting Tax Cheat?
Are You a Tax Cheat, Too?
"Our tax code is so complicated and convoluted that, in fact, it's easy to make a mistake on your tax return, just because you don't know what the law is," says Jeff Schnepper, a tax attorney in Cherry Hill, N.J.
Of course, ignorance is no excuse. If the IRS finds a mistake on your return you'll not only have to pay what you owe, but will be subject to interest and, possibly, penalties. And the responsibility for unpaid tax is yours, even if a professional prepared your return.
No matter who does your taxes, click through our gallery to see questions to ask before you sign on the dotted line.
Are You an Unwitting Tax Cheat?
Did You Report All Your Income?
Earned some extra cash from freelancing? Just because you didn't get a 1099 form (businesses aren't required to issue those if they paid you less than $600 in 2008) doesn't mean you're off the hook. Granted, the IRS won't know about that income -- that is, unless they audit the company or person who paid you. And 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. (For more information, read SmartMoney's story.)
Are You an Unwitting Tax Cheat?
Did You Take the Right Meals & Entertainment Deductions?
If you took a client out to dinner and discussed business immediately before, after or during your meal, then generally, 50% of the bill is tax-deductible. But you must have a receipt for expenses of $75 or more, containing the name of the restaurant, location, the amount paid, the person you were with and the business discussion that occurred. For expenses under $75, you don't need a receipt, but you must keep a diary with all of the above details.
Are You an Unwitting Tax Cheat?
Did You Take the Right Business Travel Deductions?
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). Personal expenses -- say, a ticket to a museum -- are not deductible. For international travel, you must generally allocate expenses based on the business and personal part of your trip, Luscombe explains. (For details, read SmartMoney's story.) If you use your car for business travel, you may deduct the costs associated with it, or take the standard mileage deduction. But you have to keep a diary, including the origin, destination, miles driven and the business purpose of the trip.
Are You an Unwitting Tax Cheat?
Did You Take the Right Home Office Deductions?
Just because you do a little work in your home doesn't mean you can take a home office deduction. In fact, most people don't qualify for this deduction because they need to use the space regularly and exclusively for business. If you use the home-office computer for personal matters, the home-office deduction is disallowed.
Are You an Unwitting Tax Cheat?
Did You Pay Taxes for a Household Employee?
If you paid that person more than $1,600 in 2008, you're supposed to pay the so-called Nanny Tax. Come tax time, the IRS should receive 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.) (Use SmartMoney's worksheet to determine the tax due.)
Are You an Unwitting Tax Cheat?
Tax Scam #4: Filing false or misleading forms -- There are some who believe that the IRS keeps secret accounts that you can access by filing special forms. This is not true. Scammers use these "forms" to convince victims that they have access to refunds they would not otherwise be entitled to.
Tax Scam #5: Non-taxable social security benefits with exaggerated withholding -- Some people turn in tax forms with non-taxable income and inaccurate withholding amounts believing they can get the wrongly claimed withholding amounts refunded. This should not be done, since the IRS can charge you thousands for this kind of mistake.
Tax Scam #6: Abuse of charitable withholdings and deductions -- The temptation of your tax preparer might be to inflate the amount of your charitable donations to get a bigger refund. Be careful, because this can cost you big if you are audited.
Tax Scam #7: Frivolous claims to avoid paying taxes -- Some preparers will tell you that if you are African American, you don't have to pay taxes because of reparations for slavery. There are other
frivolous claims that the IRS tells you to look out for that can cause your tax return to be prepared incorrectly. If something sounds too good to be true, it probably is.
Tax Scam #8: Sneaky retirement plans -- If your financial advisor convinces you to shift your retirement assets in such a way that you can get around maximum contributions or withdrawals, then don't do it.
Tax Scam #9: False corporations -- Some financial advisors may create fake corporations for their clients to help them either launder money or take excessive deductions. If your business is not legitimate, then you are at risk.
Tax Scam #10: Changing your wages -- Some have tried to argue that their W-2 wage amount is not correct, filing forms stating that their wages should be lower. If this is not the case, then avoid this activity. If you are found guilty, you face a $5,000 fine.
Lawrence Watkins is the CEO of The Great Latino Speakers Bureau and an MBA student at Cornell University. For more information, please visit LawrenceWatkins.com.
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