Filing Taxes

Most people are somewhat uncomfortable with the word "scrutiny." By and large, we don't have much to hide, but still, the idea of someone or something examining any aspect of our lives with a fine-tooth comb is going to make us nervous.

Nothing captures that fear like the idea of an audit by the Internal Revenue Service.

In fact, the very word "audit" strikes dread into the heart of any taxpayer, and every year, thousands of Americans undergo a bookkeeping inquisition that they'd really rather avoid.

Go Banking Rates wants to help you do just that by taking a look at the IRS audit process and pinpointing the best and smartest steps to keep Uncle Sam out of your living room. Let's start with the process.

The IRS and Auditing

The IRS' Fiscal Year 2009 Enforcement Results tell us the following:

• There are 21,059 IRS auditing employees
• They collected $48.9 billion through their audits
• Individual taxpayer returns totaled $138,949,670
• There were 326,249 field audits conducted
• There were 1,099,639 correspondence audits
• A total of 1.03 percent of all tax returns were audited

While that last figure is sure to make everyone breathe a sigh of relief, the fact remains that 1.03 percent of us were audited last year, and anyone who files taxes is fair game. Some of us are more likely to go under the microscope, however.

Who is More Likely to Get Audited?

In general, the more money you make the higher your chances of being audited. The IRS lays it all out as follows:

Most mere mortals make much less than $200,000 dollars a year (let alone a million or more) and so don't have too much to worry about when it comes to being audited.

What Activity Could Trigger an Audit

Still, everyone needs to avoid "red-flag" activity that could trigger an IRS audit. Some ways to avoid being audited include:

1. Triple-check your math. The IRS goes over your numbers and corrects them when they come across mistakes, but too many could call your entire tax return into question, thus prompting an audit.

2. Make sure your return is neat and legible. This might sound picayune, but if you think about it, a tax return that's got all kinds of numbers erased or crossed out -- not to mention smears and stains -- is going to make you look disorganized and hence more error-prone. What's worse, it could also make you look like you were creating numbers on the fly as you tried to make them come out a certain way. If you're going to do that, do it before you actually tackle the IRS form itself.

3. Make deductions carefully. If you get too greedy and inflate deductions, or come up with some real eyebrow-raisers then you're setting yourself up for some unwanted scrutiny. Deduct the real numbers, and keep your paperwork handy. If you want to deduct something but you think it might look weird, make a photocopy of the receipt and attach it to your return.

4. Report ALL income. When you earn money, whoever pays you is required to notify the government too, in the form of a W2 or 1099 form. If you forget to include income from one or more sources you can be sure the government won't, and will either correct and readjust your return or take a closer at it. This will also be true of other earnings and capital gains, such as the sale of property or receiving an inheritance. If you're not sure about how to proceed then get professional advice.

When it comes to avoiding an audit, don't rely on luck and the odds. Employ some common sense when filing your tax return, err on the side of flying under the radar, and be prepared for any outcome. If you do you'll be ready to face an audit with either a smile, no fear, or both.

It's pretty common for taxpayers to feel overwhelmed with the tax-filing experience, especially when they realize that they're either not ready to file or not ready to pay their taxes. It may seem that the IRS may be really strict because it stresses so much that no one can file or pay after April 15; however, there are exceptions to this rule.

If you're looking to get a tax extension, you may be eligible. However, it's important to know that there's a difference between an extension to file and an extension to pay. If you don't know the difference between the two, you could find yourself up a rocky creek without a paddle.

Extension to File Your Taxes

If you have had a rocky tax season and have complicated situations that you need to account for, it may take some time to get your tax forms together to file. It is for this reason that some decide to ask for an extension to file their taxes. The IRS grants an automatic six-month extension of time to file, which makes the process much easier. (Figure out which tax form you need now)

In order to get this extension, you must fill out a Form 4868, which is the Application for Automatic Extension of Time to File U.S. Income Tax Return. As long as you fill you fill out this form and file it by April 15, you won't be penalized.

Extension to Pay Your Taxes

If you have some or none of your tax liability to pay by April 15 and need more time then you may be granted an extension to pay your taxes. However, you must remember that an extension to file is different from an extension to pay. If you are granted an extension to file and then don't pay your tax liability, you will still be penalized, unless you file for both.

However, if you speak to an IRS representative, you will mostly likely be granted the right to file on time and pay later. Then you will receive a letter in the mail from the IRS telling you when the payment is due - this could be as much as 45 days to 6 months after filing.

Also, keep in mind that asking for an extension is not the same as asking for an installment plan. The installment plan, which requires Form 9465, usually requires that you pay between $50 and $100 to get started. The extension is free.

Penalties

Whether you're looking for an extension to file or pay your taxes, it's important to speak with the IRS and file necessary forms on time. If you don't, you could face some serious penalties:

• Failure to file penalty: If you fail to file an extension to file your taxes by April 15, you will suffer a "failure to file" penalty. This penalty can be as much as 5 percent of the balance due per month with a max of 25 percent of the taxes owed. This is pretty steep, which is why it's important to file or extend on time.
• Failure to pay penalty: On the other hand, if you fail to pay, or file an extension for your taxes, you could owe more than 10 percent of your final tax liability - or $1,000 - whichever is more. This penalty is usually 0.5 percent per month.

In addition to the penalties, you could owe as much as 8 percent in interest for the time that the balance wasn't paid. So not only is filing and paying your taxes, or asking for extensions by April 15 required, it is wise. The last thing you need is to owe a large amount only to be penalized even more just for being late.

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