The Kestner Team

Tread Carefully To Avoid Tax Disasters

By Susan Tompor

RISMEDIA, April 6, 2010—(MCT)—Two things are true about taxes: We'd rather see a refund — or at least not owe a lot of money. And we don't want any trouble.

So with the April 15 filing deadline near, pay attention to the 1040 land mines to be sure you get everything to which you're entitled and avoid a complicated tax mess.

Trouble can pop up any year — if, for example, you somehow forgot about a W-2 form and neglected to include all your taxable income. Other tripwires may be found in a slew of rule changes linked to last year's economic stimulus package.

The Internal Revenue Service, for example, says there has been a lot of fraud with the homebuyer tax credits. As a result, be prepared to send lots of paperwork to support such a claim with your tax return — and yes, you're going to have to mail that return the old way to get the credit.

Here are other ways to avoid a mess:

If you use a tax preparer, take time to study your completed return.
One reader complained that he and his wife have had their taxes done for 15 years by a certified public accountant. But in December, they got a letter from the IRS citing a mistake on their 2007 return. The couple discovered their CPA had neglected to report all of their income, despite having the necessary paperwork.

In that situation, the CPA agreed to pay the interest on the $650 the couple discovered they owed in 2007 taxes because of the CPA's error. Generally, when such mistakes are made, the taxpayer is still responsible for what would have been owed had the return been correct, said Patricia Bojanic, tax partner for Gordon Advisors in Troy, Mich.

As for interest and penalties, ask your preparer upfront.

Avoid penalties. Be sure to file a return — and pay up.
The penalty for failure to file is generally more than for failure to pay. It's far better to file your return on time even if you can't pay all that you owe.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.

Home is where accidents can happen.
The IRS is on the lookout for taxpayers who claim but don't necessarily qualify for rich tax credits for buying a home, who take deductions for a home office when they really work out of the living room or who cook up losses that are bigger than allowed on rental properties.

The rules are complicated for the latest tax credits for new home buyers and some long-time homeowners who recently bought new homes.

Some consumers have reported situations in which they received confusing or bad information about the credits from their banks and real estate agents. So research the rules — and, if necessary, talk to a tax professional.

The home buyer tax credits themselves are huge — up to $8,000 for a first-time buyer — and proved to be quite a temptation for people who were out to scam the system. So the IRS is now demanding Form 5405 — and much documentation to be filed with paper returns.

"It's going to get additional scrutiny," Bojanic warned.

One hint: Do not try to take the credit if you bought the house from your parents or grandparent. You won't qualify.

As for home offices, many tax experts say they are a well-known red flag.

A key rule: The taxpayer's "home office" space must be dedicated to "regular and exclusive use" as a main place of business. It could be where you regularly meet or deal with patients, clients or customers.
Ronald N. Silberstein, certified public accountant and principal at Silberstein Ungar in Bingham Farms, Mich., said the home office deduction is very specific and may not apply to people who are not required to work out of the home.

He said taxpayers who work from home as a convenience probably should not take that deduction. As part of an audit, Silberstein said, the IRS might require confirmation from the employer.

As for taking a loss on a rental property, again it's essential to follow the rules and be sure that you have the proper documentation. You're going to need receipts to back up expenses incurred, rents received and attempts made to rent the property, such as receipts or copies of paid ads. See Form 8582.

Avoid sounding far more generous than you really were in 2009.
Did you really hand over $15,000 to your religious group, charities or pet causes in 2009, even though your income was $100,000 or less? You gave away 15 percent or more of your money? Really?
While that might make you sound special, it also could trigger trouble with the tax titans.

No one can roll out an exact number of how much is too much to claim as a deduction for charitable contributions, but the IRS could question charitable contributions that far exceed 10 percent of your income, according to James Jenkins, president of Jenkins & Co., a tax firm in Southfield, Mich.
"It's going to turn the lights on — it's got to," Jenkins said.

So don't claim it if you really didn't contribute it.

Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A.
For any contribution of $250 or more (in cash or property), you need written acknowledgment from the qualified organization indicating the amount of money or describing the donation, and whether the organization provided anything in return. For example, if you enjoyed a $100 dinner when you bought a $250 for a ticket to a benefit, you can deduct only $150.

And if you did contribute 15 percent or 20 percent of your income, Jenkins said, he would suggest photocopying all the documents to back up those gifts and attaching them to the return.

Stay far away from tax preparers who are running scams — and guaranteeing fat refunds.
"If they don't know your tax history, how can they possibly guarantee that they're going to give you a refund — let alone a substantially bigger refund than anyone else?" said Luis D. Garcia, a spokesperson for the IRS in Detroit.

You also want to pay extra attention to e-mails that appear to be from the IRS. Many identity thieves try this trick to get you to divulge personal information.

One such phishing scam sends a bogus e-mail about a tax refund. It may use the phrase "last annual calculations of your fiscal activity."

To claim the refund, the e-mail urges the consumer to open an attachment or click on a link and complete a form. Don't do it. This is how scammers get your personal and financial information.
Dodge that disaster. The IRS isn't sending out e-mails so you can claim refunds.

(c) 2010, Detroit Free Press.
Distributed by McClatchy-Tribune Information Services.