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Who can I claim as a dependent?

Your significant other is probably many things to you—but is he or she also a tax deduction? The question of who you can claim as a dependent has confused taxpayers for years.

The short answer: You can claim a “qualifying child” or “qualifying relative” if they meet specific requirements related to residence, relationship to you, age, financial support provided and income. And yes, you may be able to claim a girlfriend, boyfriend, domestic partner or friend as a qualifying relative in some cases. Claiming dependents can give you a tax deduction worth up to $3,800 per dependent and also make you eligible for many other tax deductions like the Earned Income Tax Credit.

What is the Earned Income Tax Credit and How Do I Claim it?

The Earned Income Tax Credit is a tax credit for low to middle income wage earners that has lifted nearly 7 million people out of poverty, however many people still miss it. Why do so many people miss it? Many think they don’t make enough to file their taxes so they don’t claim it. You have to file your taxes to get this valuable tax credit, which may help a family with three dependents receive a credit worth up to $5,891.

Does healthcare reform impact my 2012 taxes?

There’s been a lot of confusion about healthcare reform and taxes. Rest assured, the requirement to purchase healthcare does not impact your 2012 or 2013 taxes. You do not have to purchase health insurance until January 2014 and there may be a few exceptions based on income, religious beliefs, and citizenship. You will not see changes to your taxes related to the purchase of health insurance until your 2014 taxes are filed in 2015 if you buy healthcare coverage at a health insurance exchange.

Are unemployment benefits taxable?

The unemployment rate has dipped to 7.9 percent vs. 8.3 percent in January 2013. But that’s little comfort to the jobless who find out their unemployment income is taxable income. The good news is that job search and moving expenses may be tax-deductible. See the next question for more details.

Can I deduct the cost of searching for a job? Are moving expenses for my new job tax deductible?

Job seekers may be able to deduct many expenses related to their search: printing resumes, fees for employment and outplacement agencies, career seminar costs and business-related travel. Moving expenses relevant to your job search may be deductible if you meet the distance and time test.

What are the tax implications of withdrawing money early from a retirement account to pay bills or debt?

In difficult economic times, many people start eyeing their retirement accounts to pay off bills or debt. While it is your money, you may be unaware of the impacts of withdrawing from your nest egg. Withdrawing money early from a retirement account comes with a 10 percent tax penalty in addition to the regular income tax on the amount withdrawn. There can be other consequences, too. The retirement money may bump you into a higher tax bracket, which can result in the taxation of other income, such as social security, that you wouldn’t have been taxed on otherwise.

What are qualified education expenses? And when can I file?

College tuition skyrockets every year, but the U.S. government provides incentives with education credits and deductions. For example, the American Opportunity Credit, which was extended through 2012, benefits full-time and part-time college students with a maximum $2,500 credit per student, provided you meet modified adjusted gross income requirements.

My house foreclosed, how does that impact my taxes?

The Mortgage Forgiveness Debt Relief Act survived the recent ‘fiscal cliff,’ receiving a one-year extension through 2013. This means you don’t have to pay taxes on the loss of your home through foreclosure or short sale, up to $2 million (or $1 million if married filing separately).

I started my own business; can I deduct my home office expenses?

Many entrepreneurs are reluctant to write off the business use of their home for fear of being audited. But home office expenses are a legitimate tax deduction you shouldn’t miss out on. Keep in mind the space you claim as a home office should be used exclusively and regularly for that purpose.

Will January tax law changes impact my taxes?

On Jan. 1, 2013, Congress kept the U.S. from going over the ‘fiscal cliff’ by passing The American Tax Relief Act of 2012. The act includes a permanent extension of the Alternative Minimum Tax (AMT) patch, the permanent reduction of tax rates and the reinstatement of several tax deductions, including the Educator Expense Deduction, the Tuition and Fees Deduction, and state sales taxes in lieu of state income taxes.

I was impacted by a natural disaster in 2012. What tax breaks are available to me?

Hurricane Sandy and other natural disasters last year left many picking up the pieces, filing insurance claims, and wondering how it will affect their taxes. It’s possible to take a tax deduction for property loss claims not compensated by insurance, or in some special cases, when you’re still waiting for compensation. These are known as casualty losses and include hurricanes, floods, earthquakes, tornadoes, fire—even vandalism and shipwrecks.

What if I still have questions?

TurboTax is here for you. Only TurboTax let’s you talk to tax experts who are CPAs, IRS enrolled agents, and tax attorneys while you prepare your taxes, free.

1.  First, combat pay is not subject to Federal income tax. Combat Zones are defined by the federal government under executive order, and currently include Arabian Peninsula Areas, Kosovo area, and Afghanistan.

The lack of any family income could disqualify civilians from receiving any Earned Income Tax Credit (EITC). Even though the combat pay received isn’t taxable, it may be included as income for purposes of qualifying for the EITC. The EITC is based on income and the number of children you have, and may be as much as $5,891 for a family with three or more children. This credit is refundable meaning even if you have no tax at all for the year, you can still receive this credit.

2.  The Roth Thrift Savings Plan was introduced this year providing an excellent alternative to the standard pretax plan that had rules similar to the private sector’s 401(k). As combat pay isn’t taxed, the ability to put some of this money into a Roth designated retirement plan will provide you and your family with a tax free benefit when you retire.

3.  You may have taken a withdrawal from an IRA, 401(k), 403(b), or other qualified plan. If so, the 10% penalty for early distribution will not apply, only the tax that would normally be due for the non-taxed portion of the withdrawal.

If this is your situation, I’m happy to share with you a unique opportunity, the ability to make up this withdrawal. You have up to two years after your active duty ends and are permitted to deposit these returned funds to an IRA even if it was taken from a 401(k) or other qualified plan. This transaction is reported on form 8606. A very nice, yet little-known benefit you might use.

4.  For moving expenses to be a deduction for civilians, there are a number of requirements to meet. Not so for those on active duty. You are able to deduct the cost of moves from your home to your first post, moves from one permanent post of duty to another, and finally, for the move home within a year of your active duty coming to an end. Eligible expenses include the cost of moving household goods and travel costs for you and the members of your household. This includes your spouse and dependents.

5.  If you are selling your home, the current test to take advantage of the $250K (Single)/$500K (Married Filing Joint) exclusion of gains is that you must have lived in the house for two of the prior five years. Members of the armed forces are permitted to suspend the 5-year look-back for as many as ten years. In effect, if you qualify for the two/five rule, the time you are serving will not let the five years get behind you.

6.  Last I’d like to share that TurboTax has introduced TurboTax Military Edition. It’s free for those at a pay grade of E-1 to E-5. It will help you capture the tax credits and deductions that are offered to the men and women who have served.

How Much is the Educator Expense Deduction?

The maximum Educator Expense Deduction is $250 per individual.  In the event both spouses are educators and each spends at least $250 on qualified educator expenses, the maximum deduction on their joint return is $500.

What Expenses Qualify for the Educator Expense Deduction?

The IRS has determined that the following expenses qualify for the deduction:

• supplies
• computer equipment (including related software and services)
• other equipment, and
• supplementary materials that you use in the classroom

Keep in mind that health and physical education teachers who incur educator expenses must use them in athletic education to qualify for the deduction.  In addition, all expenses must be unreimbursed to be deductible (If you’re not out-of-pocket due to the expenditure, you didn’t really incur the expense).

Who Qualifies for the Educator Expense Deduction?

Not surprisingly, you must be an educator to be able to take the deduction.  This means you can be a teacher, instructor, an aid, or pretty much anyone who spends 900 hours or more per year in a elementary or secondary school.  Principals qualify too, but home school educators do not.

In addition, you must file either file a Form 1040 or a Form 1040A to deduct your educator expenses.  While some tax deductions require taxpayers to itemize in order to benefit, the Educator Expense Deduction does not. As a result, every taxpayer with the bona fide educator expenses described above will save money on their taxes.

TurboTax walks you through the appropriate tax questions to make sure you get this tax deduction if you’re eligible, so you can keep more of your hard-earned money.  If you still have questions, only TurboTax lets you talk to CPAs, IRS enrolled agents, or tax attorneys while you prepare your taxes, free.

Senior enlisted personnel ranks E-6 to officer can file their federal tax return with TurboTax Military Edition at the discounted price of $24.99.

TurboTax Military Edition was created by active, reserve, and retired military personnel and military spouses to address the specific challenges that come with being a military tax filer. Filers have free, year-round access to certified CPAs, IRS-enrolled agents, and tax attorneys who can provide expert, one-on-one personalized answers to your tax questions.

With step-by-step guidance to help you claim every tax deduction and credit you’re entitled to, TurboTax Military Edition is easy to use and walks you through military specific provisions, including:

• State of residency
• Filing in multiple states
• Combat pay
• BAS and BAH
• Deductions for uniforms, relocation, PCS, and special provisions for the earned income tax credit

Military members are already seeing the benefits of filing their taxes through a product designed by the military, for the military. Here’s what they’re saying:

• Polluelo, Fort Bragg, NC: “I would like to thank TurboTax for supporting the troops by giving this service for free. I will recommend TurboTax to everybody. Thank you again. Companies like TurboTax make serving our country easier.”
• MonicaCharly, Van Nuys, CA: “It was totally easy to do my own taxes, I was scared to try it for fear that I would screw up and end up having to pay an exorbitantly huge amount of money to fix! You guys made it so simple, explained everything.”
• Ypbenji, Holloman AFB, NM: “Way better than H&R Block! Love love love! Can’t believe I’ve done my taxes with H&R Block for the last 3 years. Even after the military, TurboTax will be our way to go to file!”

Fortunately I never had to go through that experience. There are so many advantages to using tax software that I couldn’t possibly name them all. I will, however, name the three biggest reasons why I’ve never been tempted to do my taxes by hand.

With Tax Software No Need to Know the Tax Code

The number one reason why I think tax software is incredible is you don’t have to know the tax code. The software does it for you by asking you simple questions that you can answer. TurboTax walks you through the appropriate questions related to your tax situation and makes sure you don’t miss tax deductions or credits that you’re eligible for.

Tax Software Can Be Updated

This is especially valuable this year because of the fiscal cliff resolution that was passed earlier in the year. If you paper file, your printed forms may be outdated and while the IRS will still accept it, it might be confusing if you review them later on in the year or, should you need to, years in the future.  Tax software like TurboTax is updated with the latest tax laws.

Tax Software Can Collect Tax Information

My favorite feature in tax preparation software is the ability to pull in tax data from outside sources like payroll processors. Instead of having to type in all the data from your W-2, you can download it from a processor like ADP and save yourself time and headache, in case you enter in the wrong numbers.

Software, especially tax software, has really simplified our lives and reduced the potential headaches. If you have been doing them by hand, consider software.

TurboTax is up to date with all tax law changes, so you can file today and feel confident that your will get every tax deduction and credit you deserve.  And remember, if you have any questions, only TurboTax lets you talk to CPAs, enrolled agents and tax attorneys as often as you like while you prepare your return, free.

The holidays have come to a close, we avoided the “Fiscal Cliff”, so now is the time to start the New Year fresh by getting a jump-start on your taxes so you can keep more of your hard-earned money.  Wondering how to get a head start?  TurboTax is up to date with recent tax law changes and is accepting e-files now!

We know you work hard for your money. Whether you are a teacher or a construction worker, a firefighter or serviceman or woman, TurboTax gives you the power to get more of it back.

We guide you through a personalized experience to help you find every tax deduction and credit you deserve – whether a soldier’s deployment pay, a student’s loan interest or a teacher’s crayons – so you know you’re keeping all of your hard-earned money.

Plus, highly qualified TurboTax tax experts are available year-round for free so you can get answers to your tax questions, even before starting your returns. And only TurboTax lets you talk to certified public accountants, IRS enrolled agents or tax attorneys as often as you like while you’re preparing your tax return, free.

New in TurboTax

• TurboTax Military Edition: Specifically created for members of the military by TurboTax employees who are members of the military and our TurboTax experts, TurboTax Military Edition addresses the unique tax situations and challenges facing servicemen and women.   If you are a member of the military the specialized product guides you through state of residency and combat pay questions, as well as deductions for uniforms, permanent change of station and special provisions for the earned income tax credit. TurboTax Military Edition is also free for junior enlisted personnel, rank E-1 to E-5, through Feb. 14.

• Personalized Interview: TurboTax 2012 offers customized income entry to help you easily and accurately enter your information. TurboTax focuses on the most common types of income and provides visual images of typical forms, like a W-2 or 1099, so you know exactly what to do. Because TurboTax tailors questions to your unique tax situation, you see only what is most relevant to your situation.

• MyTurboTax: New for TurboTax Online customers, MyTurboTax delivers a personalized experience so you can check your e-file and refund status, view orders, access prior year returns, and manage your account settings, including SMS text notifications for your e-file status. MyTurboTax is mobile and tablet optimized so everything is available on-the-go, anytime, all in one place.

File on Smartphone or iPad

Everyone is on the go these days so TurboTax makes it easy to get the money you deserve while being mobile.  Whether you want to estimate your taxes, prepare and e-file your tax return, or track your tax refund, TurboTax has a mobile app for that.

TurboTax SnapTax, the first mobile tax preparation app, is available to even more people this year. In addition to 1040EZ filers, now if you have dependents or claim the earned income tax credit, you can also snap a photo of your W-2, answer a few simple questions, and e-file within minutes from your smartphone.

You can use SnapTax to start your taxes for free by snapping a picture of your W-2, and then with a click, securely transfer that information to TurboTax Online. In addition, if you e-file your tax return you can track the status of your federal tax refund with MyTaxRefund, a free app available for iPhone, iPod Touch, and Android devices.

Starting in mid-January, you can also conveniently prepare and e-file your taxes from your iPad and download TurboTax for the Mac from the Apple App Store.

Happy New Year and happy filing!

Carlos was moved to the wounded warrior battalion where he worried every day about how he would support his family once he was medically retired. His wife, Patricia, was laid off soon after. Not only had Carlos fought for his country, he now faced a real financial battle at home.

Carlos isn’t alone. There are tens of thousands of U.S. service men and women just like him who need help to get back on track.

That is why TurboTax and Operation Homefront have launched Mission2Match, a cooperative fundraising effort to support troops and their families facing money emergencies. Operation Homefront is a charitable organization that provides emergency financial support and assistance to America’s service men and women.

In fact, Carlos and his family turned to Operation Homefront when they had nowhere else to go. Operation Homefront helped his family find a safe place to live, financial assistance to make ends meet and make a plan for their future. “If it weren’t for Operation Homefront, it wouldn’t be good at all,” Carlos said. “This is a blessing and then some.”

And now you can lend a hand to those who serve our country! We’re asking you to join us in supporting our troops. In fact, we’ll match donations up to $1 million, for donations made now through April 15, 2013.

How to give

TurboTax Online customers will be given the opportunity to donate from within the product after they’ve completed their taxes. Donations can be made now at http://www.mission2match.com. Only donations made through the Mission2Match campaign are eligible for matching. Donations will be matched a second time when donors tweet with #mission2match via Twitter and share the opportunity to give with their social network.  Your $5 donation could potentially become $15.

We hope you’ll join us in supporting Operation Homefront military families and wounded warriors who have given so much.

Election

We all know that donations to charities are deductible. But if you contributed to a candidate or political party or a PAC (Political Action Committee), is your contribution deductible? In a word, NO. Political contributions aren’t deductible even if you are running for office and spending money on your own political race.

You’ll find the official word from the IRS in IRS Publication 529 [Miscellaneous Deductions]: “You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible.”

There aren’t many ways to get around these rules. Lobbying expenses you incur trying to influence legislation or political campaigns aren’t deductible. Costs of mailers that you pay directly don’t pass muster. Fundraising dinners and events don’t qualify for tax deduction. And contributions to organizations whose primary purpose is influencing legislation won’t be deductible either.

About the only way to fund a political campaign with funds on which you haven’t paid taxes is to check the box on your tax return that asks if you want to donate $3 to the Presidential Election Campaign Fund. The funds raised are distributed to the two parties and their two presidential candidates during the months leading up to each presidential election. If you decide to make this donation it won’t affect your tax liability or refund.
If you truly want to use your time and influence to make a difference, here’s my best advice: VOTE!

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How much did you spend on your last date?

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Ask a Tax Expert

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Bad Investment

The IRS won’t give you back the money you lost, but Uncle Sam will let you take a deduction for the loss. But there some rules you must know.

1. You can’t take an investment until the year the investment becomes worthless, so you’ll have to show that the stock had value at the beginning of the year, but not at the end of the year. If you bought stock in a company that went bankrupt, until the bankruptcy is discharged you might not know whether you can collect anything, so you get no deduction until then.
2. You can deduct losses on the sale of securities. If you believe that the stock won’t ever pay off, but you can’t prove it is worthless, sell it on the open market for a few pennies or a dollar to nail down your deduction.
3. If you can’t sell the security, you can abandon it. You do that by giving up all rights in the security and not receiving anything in return.
4. If you learn your investment became worthless in a prior year, file an amended tax return for that year to claim a refund. Though usually you have just three years to file an amended return, in the case of worthless investments you have up to seven years from the date your original return was due to claim a deduction.
5. You report the loss on Schedule D of your tax return, and list it as though it were an asset sold on the last day of the year.  TurboTax easily guides you through the interview and puts your tax information on the appropriate forms so you can take this deduction.

You are also entitled to deductions on your tax return for ongoing expenses in connection with your investments. These are listed on Schedule A of your return as miscellaneous deductions and are deductible to the extent they exceed 2% of your adjusted gross income. Here are a few of the investment expenses that qualify for deduction:

Investment advice. If you pay a fee to have your investments managed, or consult periodically with an investment advisor or accountant, those fees are deductible. That doesn’t include commissions that you pay to buy or sell a security, though. Commissions are added to the cost basis of the security and reduce the gain when you sell the asset.

Publications. If you are an active investor and subscribe to investment magazines, newspapers and newsletters, the costs of those publications are deductible.

Investment interest. If you have borrowed on margin or against other assets such as your home to invest in stocks or bonds, you may be able to claim a deduction for the interest you pay each year. Your deduction is limited to the amount of investment income you have for the year, which includes interest and dividends. Any investment interest expense you can’t use this year can be carried over to future years.

Other investment costs. You can deduct safe deposit box rental fees you pay to safekeep your stock certificates or other investment documents. You can also deduct IRA and retirement account fees, if you pay them out-of-pocket rather than having them deducted from your retirement account.

Standard Deduction vs. Itemized

What Is a Standard Deduction?

The standard deduction is a fixed dollar amount that can be subtracted from your Adjustable Gross Income (AGI) to reduce the amount of taxes you owe. The specific amount is set every year by the IRS and is usually adjusted for inflation. Which of the standard deductions you can take is determined by your filing status, such as Single or Married Filing Jointly. Taking the standard deduction precludes you from itemizing any of your deductions.

What Is an Itemized Deduction?

Itemized deductions are expenses that fall under a long list of IRS allowable categories. Some of these categories are dental and medical expenses, home mortgage interest, charitable contributions, business use of a home or car and deductible taxes. You must have paid these expenses for yourself or for one of your dependents, such as your spouse or child. Additionally, you must be able to document these expenses with receipts.  You don’t need to know what these deductions are.  TurboTax will easily guide you through itemized deductions.

How Do I Choose?

Itemizing will usually be the way to go if you had large non-reimbursed dental and medical expenses or if you had interest expense on a mortgage, paid property taxes, had large employee business expenses that were not reimbursed by your employer, had major uninsured casualty losses or made large contributions to charities, but TurboTax will make the appropriate choice for you based on your entries for these expenses.

When You Don’t Have a Choice

There are times the choice will be made for you. You cannot use the standard deduction if you are a non-resident alien. If you are married filing separately, and your spouse chooses the standard deduction, you cannot itemize. If you do not have the necessary records for itemizing, then you have use the standard deduction. If you qualify to file Form 1040EZ or 1040A, you cannot itemize, though you may be able to claim certain exemptions and credits.

Both types of deductions are very important because they are a way to reduce your taxable income. While it is may take some time to gather receipts for itemized deductions, you might find it a worthwhile effort as you try to make your taxable income as low as you legally can.

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Just a few weeks ago, TurboTax announced the launch of TurboTax for Android tablet customers.  Today, we are expanding that announcement to include TurboTax (Kindle Fire Edition).  It’s exciting to add yet another mobile offering to the robust suite of mobile apps available to taxpayers this tax season.

TurboTax(Kindle Fire Edition)

With sales of Kindle Fire units on the rise, the new app reaches more customers and helps them prepare and e-file their federal and state tax returns on the device of their choice.

Designed and optimized specifically for the Kindle Fire, this app gives you the freedom to work on your taxes anytime, anywhere, and without always being connected to the Internet.  With the 7-inch screen in landscape position, you can easily navigate (or tap) your way through your taxes with step-by-step guidance to your maximum tax refund.

Just like other TurboTax apps, your tax return can be password protected for an extra layer of security. You can e-file your tax return directly from your Kindle Fire tablet and get a refund in as little as seven days with direct deposit and then easily and securely email a copy of your tax return to your computer.

While you currently cannot transfer previous year tax information or import income automatically, the app is ideal for new TurboTax customers, who haven’t yet started their return.

Need free tax advice?

This year, TurboTax is the only software to offer everyone free one-on-one live tax advice, via phone or chat from highly experienced tax professionals.

Free to download, pay when you’re done!

Kindle Fire customers can download the app via the Amazon Appstore.  Users can start in TurboTax Deluxe, for $29.99, and based on your tax situation, you can choose TurboTax Premier or TurboTax Home & Business for an additional cost. State tax preparation is additional. All pricing is subject to change and includes e-file at no additional cost.

To learn more and see the new app in action, check out the video.

Business Tax Deadline

Many W-2 employees have already filed their tax returns and are enjoying hefty refunds while you, lucky business owner, are sorting through receipts, and constructing accounting records, but it doesn’t have to be painful if you use Quickbooks, TurboTax, and follow these tips.

If your business is incorporated and reports on the calendar year basis, as most do, your corporate tax return is due on March 15. If you own a partnership, LLC or sole proprietorship and you are not incorporated, your tax return isn’t due until April 17 this year.

If you miss those deadlines, you can apply for an extension for filing, but do you really want to have your taxes hanging over your head all summer? Best to knuckle down and get it done right now, if you can.

But in your rush to pull everything together for last-minute filing, don’t overlook some important deductions.

Organize your receipts – If you have tax receipts stashed here and there, carefully gather them together in one place and make a list of them. Add that information to the accounting records you create from your check register and credit card statements, being alert for duplications. Don’t ignore these extra deductions: tossing out $100 of deductible receipts is like throwing $30 in the trash. Don’t forget to include end-of-year credit card purchases. They are deductible when you charged them, even though you didn’t pay the credit card statement until the next year.

Home office deduction – Many business owners work from home – if you have space in your home dedicated to business activities, it is likely you are entitled to a home office deduction. TurboTax will lead you through a series of simple questions to be sure you qualify for the deduction. Take the deduction if you qualify – there is an urban legend that claiming a home office deduction will target you for an IRS audit, but that simply isn’t true.

Auto expense – Even if you work from home, you probably use your vehicle to visit clients, run to the post office or purchase supplies. Add up those trips and claim a deduction for the miles.

Save for retirement – If you’ve claimed all your deductions but your tax bill is still high, consider contributing to an IRA, SEP or SIMPLE. Though pension plans have to be established before year end, IRAs, SEPs and SIMPLEs can be set up and funded any time before the due date of your tax return. TurboTax will compute the maximum contribution you can make, but even if you contribute less than that you still will enjoy some tax savings while securing your future retirement.

Hire your children – Now is the time to begin planning for next year’s tax filing. If you have older children, hire them to do office clerical duties and other routine tasks for your business. Children can earn income up to $5950 in 2012 if you claim them as a dependent before they have to file tax returns, and children employed by their parents aren’t subject to social security and Medicare taxes if the business is operated as a sole proprietorship or a partnership between the parents.

Pay estimated taxes – Unlike W-2 employees, business owners don’t have taxes withheld from their income, so to avoid penalties you are required to pay estimated taxes. When you prepare your return, TurboTax will ask you if you want to compute the estimated taxes you must pay for the rest of the year so you won’t owe penalties when you file your tax return next spring.

Audit

In fact, a true audit happens to very few people every year, and it’s usually because of a glaring problem or unusual situation found on a tax return. More common are correspondence audits and adjustment letters, which are not like the audits you hear horror stories about.

The Examination Audit

A traditional tax audit is usually picked up by computer programs that are set up to detect irregularities on tax returns that might signal there is a problem. While it may seem like a simple error or wrong number may instantly create a red flag and cause you to get audited, that’s not exactly how it works. In fact, the IRS typically audits less than one percent of all tax returns filed each year.  Also, keep in mind that not all audits mean the IRS is out to get you and stick you with a greater tax bill. They are looking for problems and inconsistencies and it could actually result in getting a larger refund.

If you do receive a letter stating that the IRS would like to conduct an examination audit, there will be instructions as to how to provide the information they need. Some of these audits can be conducted through the mail, but in other instances it may require meeting an auditor in person either at your home, place of business, or an IRS office. At the end of the audit process there will be a determination as to what needs to be done to satisfy the IRS. There is an appeals process if you don’t agree with the outcome.

The Correspondence Audit

The correspondence audit is far more common than the examination audit that people think about when they hear the word audit. Again, these are usually triggered by software that compares returns against common trends and selects those that don’t match for a correspondence audit. The IRS will mail the taxpayer either a Letter 566 or a CP 2000 notice. The 566 letter advises taxpayers that their return has been selected for examination and will list documents needed to verify the return. The CP 2000 notice will contain adjustments based on third-party documents associated with the return. In these types of audits it may be as simple as providing copies of a 1099 form to verify the numbers match what was reported to the IRS.

The Adjustment Letter

Finally, the letter you receive from the IRS may simply be an adjustment letter or adjustment notice. These are simply letters sent out to give notice to a taxpayer about additional taxes owed or a change in the refund amount. The reason there may be additional taxes owed is typically just because of a miscalculation or a wrong number entered on your tax return.

For a list of the different IRS notices sent out and what action needs to be taken for each, the IRS has a comprehensive list.

In the unlikely event that you receive an audit notice from the IRS, don’t worry.  If you prepare your taxes with TurboTax this year, TurboTax Audit Support Guarantee provides free one-on-one guidance from an experienced tax professional to help you know what to expect and how to prepare if you receive an audit letter.

K-1

But the strangest thing happened today – you opened the mail and there, with your name on it, is a tax form you’ve never seen: Form K-1. You weren’t expecting it, you never received one before, and you just got it, only a month before the tax deadline.

You: What gives?

A K-1 is a tax form distributed by many partnerships, S-Corps, estates, and trusts.  If you are a general or limited partner of a partnership, a shareholder in an S-Corp, or the beneficiary of an estate or trust, you’re likely to receive a K-1.

You: But what is it?

A K-1 is just like a W-2 or other tax form.  You use the information provided on the form to accurately complete your tax return.  Except as illustrated in the opening scenario, K-1s are often distributed much later in the year than other tax forms.

You: Why do they arrive so late?

In order for the entity to send you the K-1, it first needs to complete its own tax return.

You: Huh?

For example, a partnership must prepare its taxes- its partnership tax return – before it sends out the K-1s to the partners.   The due date for most partnership tax returns is March 15. Consequently, K-1s are often received much later than other tax forms. Furthermore, like individuals, partnerships can request extensions of time to file, often until September 15.

You: So I might not receive a K-1 until after April 17, the deadline for my tax return?

Indeed, it’s not only possible, it happens routinely.

You: So how do I plan for that?

Most people who receive K-1s know they will receive them.

You: How do they know?

It’s rare to own a partnership or be a trust fund kid and not know it.

You: I suppose you’re right. So if get one of these K-1s, what would I do next?

Once you’re ready to start your tax return, collect all your tax forms, including any K-1s. If you’re using tax software, the program will tell you what you need to do with each form. TurboTax easily guides you through entering items reported on your K-1 and puts the information on your proper tax forms.

So, don’t lose too much sleep; the K-1 is, ultimately, just another form used to complete your taxes and report your income to the IRS.