Frequently Asked Questions

When is my tax return due?

Individuals, Partnerships, Trusts and LLCs filing as partnerships

The return is due on the 15th day of the 4th month after the end of the tax year. For calendar year tax payers this is April 15th.

Corporations and LLCs filing as associations

The return is due on the 15th day of the 3th month after the end of the tax year. For calendar year tax payers this is March 15th.

Exempt organizations

For most exempt organizations, Form 990-T is due annually by the 15th day of the 5th month after the end of the tax year.

Estates

Nine months after the date of death.

Gift tax returns

April 15th following the year in which the gift is made.

If the due date falls on a Saturday, Sunday, or legal holiday, the due date is the next business day.

How long should I keep my tax papers and records?

At least three years, but six years is recommended. The statute of limitation gives the IRS three years after you file a tax return to audit you. However, the IRS can audit you for up to six years if it suspects that you underreported your income by 25% or more. If the IRS suspects fraud, there is no time limit for an audit. Records of purchases of real estate, stocks, and other investments that prove basis should be kept for at least three years after the tax return reporting their sale was filed.

How do I know if I have to file quarterly individual estimated tax payments?

• You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
• You expect your withholding and credits to be less than the smaller of:
• 90% of the tax to be shown on your current year’s tax return, or
• 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

There are special rules for higher income taxpayers, farmers and fishermen, nonresident aliens and estates and trusts.

What should I do if I made a mistake on my federal return that I have already filed?

• Many mathematical errors are caught in the processing of the tax return itself so you may not need to correct these mistakes.

• If you did not attach a required schedule, the IRS will contact you and ask for the missing information.

• If you did not report all of your income or did not claim a credit, you should file an amended or corrected return using Form 1040X.

Should I notify the IRS of my change of address?

Yes, if you move, you need to notify the IRS of your new address. The IRS needs to change their records so that any tax refunds due to you or any other IRS communications will reach you in a timely manner. If you filed a joint return, you should provide the same information and signatures for both spouses. If you filed a joint return and you and/or your spouse have since established separate residences, you both should notify the IRS of your new addresses.

What is the difference between a Form W-2 and a Form 1099-MISC?

• Report wages, tips and other compensation paid to an employee.

• Report the employee's income and social security taxes withheld and other information. See General Instructions for Forms W-2 and W-3 for more information.

• Report wage information to the employee, and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

• Used generally to report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.

• Required when payments of $10 or more in gross royalties or $600 or more in rents or compensation are made.

• Provided by the payer to the IRS and the person or business that received the payment.

Is there an age limit on claiming my child as a dependent?

To be claimed as your dependent, your child must meet the qualifying child test or the qualifying relative test. While the child's age is a factor in the qualifying child test, it is not in the qualifying relative test. An individual meeting the qualifying relative test may be of any age.

• Qualifying child or qualifying relative test,
• Dependent taxpayer test,
• Citizen or resident test, and
• Joint return test.

How much does an unmarried dependent student have to make before he or she has to file an income tax return?

If you are an unmarried dependent student, you must file a tax return if your earned and/or unearned income exceeds certain limits.

• To find these limits refer to Dependents under Who Must File, in Publication 501, Exemptions, Standard Deduction and Filing Information.

• Even if you do not have to file, you should file a federal income tax return if you can get money back (for example, you had income tax withheld from your pay; you qualify for the earned income credit; or you qualify for the additional child tax credit).

If I claim my daughter as a dependent because she is a full-time college student, can she claim herself as a dependent when she files her return?

If you can claim your daughter as a dependent on your income tax return, she cannot claim herself on her income tax return.

• If an individual is filing his or her own tax return, and the individual can be claimed as a dependent on someone else's return, the individual cannot claim his or her own personal exemption.

• In this case, your daughter should check the box on her return indicating that someone else can claim her as a dependent.

Is the loss on the sale of your home deductible?

Losses on the sale or exchange of personal use property, including a loss on the sale of your home used by you as your personal residence at the time of sale, is not deductible. Only losses associated with property used in a trade or business and investment property (stocks) are deductible.

Can I ever save tax by filing a separate return instead of jointly with my spouse?

You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

• One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
• The spouses' incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately.

How does the IRS select audit targets?

• Computer Scoring — Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

• Large Corporations — The IRS examines many large corporate returns annually.

• Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.

• Automated Underreporter Program (AUR) is a document matching initiative that results in CP-2000 notices that show proposed changes to a taxpayer's income tax return.

• Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.

• Potential participants in abusive tax avoidance transactions — Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions.

What do the IRS auditors look at when performing audits?

Auditors are trained to spot common types of fraudulent acts by taxpayers. The acts are called badges of fraud. Auditors know that the tax law is complex and expect to find few errors in every tax return. The most common “badges of fraud” commonly used by taxpayers to deceive or defraud the government include the following:

Income:

Omissions of specific items where similar items are included; omissions of entire sources of income; substantial unexplained increases in net worth; substantial excess of personal expenditures over available resources; bank deposits from unexplained sources; concealment of bank accounts, brokerage accounts, and other property; inadequate explanation for dealing in large sums of currency; failure to deposit receipts to business account; failure to file return, especially for a period of several years; covering up sources of receipts; substantial overstatement of deductions; substantial amounts of personal expenditure deducted as business expenses; claiming fictitious deductions; dependency exemption claimed for non-existent, deceased, or self-supporting persons.

Books & Records:

Keeping 2 sets of books or no books; false entries or alternations, backdated/postdated documents, false invoices, applications, statements or other documents; failure to keep adequate records, concealment of records; intentional under/over footing in journal or ledger; amounts on return not in agreement with amounts in books;

Allocation of income:

Distribution of profits to fictitious partners; inclusion of income/deductions in the return of related taxpayer, when difference in tax rates is a factor.

Conduct of taxpayer:

False statements about material facts; attempts to hinder the examination; failure to answer pertinent questions, repeated cancellations of appointments, or refusal to provide records; testimony of employees concerning irregular business practices; destruction of books/records; transfer of assets for purposes of concealment or diversion of funds; patterns of consistent failure over several years to report income fully; use of false social security numbers; submission of false W4s, affidavits or other documents; attempts to bribe the examiner.

Methods of Concealment:

Inadequacy of consideration; insolvency of transferor; assets placed in other names; transfer of all or nearly all of debtors’ property; close relationship between parties to the transfer; transfers made in anticipation of tax assessments or investigation; retention of possession; transactions surrounded by secrecy; unusual disposition of the consideration received for the property; use of secret bank accounts; conduct of business transaction in false names.

I have asked my CPA regarding a tax position and I have also discussed the same matter with representative from the IRS. However, I am getting conflicting opinions and I am confused. Who should I trust?

The tax law is very complex and sometimes unclear and confusing. Both CPAs and IRS representatives can give you wrong answers. Some CPAs don’t do much tax work and are unfamiliar with the intricacies of the system, Some IRS representatives are newly hired and inexperienced and can give you misleading answers. When you get conflicting advices, ask your source, what is the authority behind their position. Most often, they will point you to an IRS Publication. However, keep in mind that, although informative and generally pretty good, the publications are pretty far down the food chain in terms of authority. In fact IRS is NOT bound by them, nor is the Tax Court. The primary source of authority for taking a tax position is the Internal Revenue Code ( the IRC, or the Code ). Then there is the Case Law, the Regulations, and the Revenue Rulings. When in doubt, check your source of authority.

What kind of penalties can I expect if I don’t comply with the tax laws?

The Internal Revenue Manual (IRM) alone indicates the there are over 140 separate penalty provisions. The primary penalties which pertain to individual tax returns are:

Penalty for failure to file a return (IRC Section 6651)

Taxpayers who do not file a timely tax return may be fined 5% per month of the amount of tax due up to maximum of 25%. If the failure to file is fraudulent, the monthly fine is increased to 15% and the maximum fine is increased to 75%.

Penalty for failure to pay tax (IRC Section 6651)

Taxpayers who do not pay their taxes on time may be fined 0.5 percent per month of the amount of tax due up to 25%. If a deficiency is assessed and is not paid within 10 days of the demand for payment, the taxpayer can be penalized with up to a 25% additional tax if the failure to pay continues.

Penalty for underpayment of tax (IRC Section 6662)

Taxpayers who underpay their income tax may be fined 20% of the amount of the underpayment. This penalty only applies to that portion of the underpayment attributable to:

• negligence or disregard of IRS rules and regulations,
• a "substantial understatement" of tax
• a "substantial valuation misstatement". The rate is 40% is the misstatement is over 200% of the correct amount.

Civil fraud penalty (IRC Section 6663)

Taxpayers who underpay their income tax due to fraud may be fined 75% of the amount of the underpayment. The IRS has the burden of proving civil fraud.

Erroneous claim for credit (IRC Section 6676)

Taxpayers who underpay their income tax due to any erroneous claim for credit or refund filed after May 25, 2007 may be fined 20% of the disallowed refund or credit. The 20% penalty is applied to the disallowed portion of the claim for refund or credit for which there is no reasonable basis for the claim. The penalty is $5,000 if a taxpayer files a frivolous return.