This organizer is designed to help you:
How To Proceed
We recommend that you follow these steps in preparing your return.
Before preparing your return, collect your records. You cannot prepare your return unless you get your personal tax data in order. Even if you employ a tax professional to prepare your return, you must complete this important step. The records you need are listed on page 630. If you are using a tax return preparer, see page 628.
Review your tax returns for prior years. They will refresh your memory of how you handled prior items and remind you of deductions, carryover losses, and other items you might otherwise overlook. You may obtain copies of prior-year tax returns by filing Form 4506 with the IRS and paying a fee.
Decide whether to use Form 1040EZ, 1040A, or 1040 with the aid of the checklist on page 634.
After you have decided which return to file, review the form to familiarize yourself with its details.
Use the tax tables starting on page 689 to look up your tax liability if your taxable income is less than $100,000. If your taxable income is $100,000 or more, you must use the tax rate schedules in Section 23.2. After you have completed your return, put it aside and postpone checking your completed return for several hours or even a day so that you can review it in a fresh state of mind. See below for common errors that might delay a refund or result in a tax deficiency and interest costs.
Finally, photocopy your return and keep the copy along with receipts, canceled checks, and other items to substantiate your deductions.
Checking Your Return for Possible Errors
Check your return to ensure the following before mailing it to the IRS:
Using a Computer to Prepare Your Return
Tax return software has reached a high state of proficiency. If you have a personal computer, any one of the leading software programs will aid you in preparing your return by facilitating the calculation of sums, percentages, and tax liabilities. However, do not rely entirely on the computer program if you are preparing your return by yourself. You may inadvertently make an error by inputting the wrong information or there might be a quirk in the software itself. A suggestion: prepare a return by hand and then prepare a return using the computer program; each will act as a check for the other.
Form 1040 PC. Some commercially available tax preparation software programs allow you to generate a Form 1040 PC, a condensed tax form that prints only the lines for which you have entries. A paid tax preparer can also produce a Form 1040 PC for you. Form 1040 PC is easier for the IRS to process than a regular return, and allows for a direct deposit of a refund into your personal account.
Apply for Extension If You Cannot File on Time
If you cannot file your return on time, apply by the due date for an extension of time to file. Send the extension request to the Internal Revenue Service office with which you file your return.
Automatic filing extension. You may get an extension without waiting for the IRS to act on your request. You receive an automatic four-month extension for your return if you file Form 4868 by April 15. The extension gives you until August 15 to file your return. A late filing penalty will not be imposed if you fail to submit a payment with Form 4868 provided you make a good faith estimate of your liability based upon available information at the time of filing. Although the extension will be allowed without a payment, you will be subject to interest charges and possible penalties on taxes due after April 15.
Abroad on April 15. You do not get an automatic extension for filing and paying your tax merely because you are out of the country on the filing due date. If you plan to be traveling abroad on April 15, and want to get a filing extension, you must submit a claim for the automatic four-month filing extension on Form 4868.
The only exception is for U.S. citizens or residents who live and have their main place of business outside the U.S. or Puerto Rico, or military personnel stationed outside the U.S. or Puerto Rico, on April 15. Such taxpayers qualify for an automatic two-month extension, until June 17. Such taxpayers may receive an additional two-month extension by filing Form 4868 by June 17 and making a proper estimate of the taxes due; as just discussed, payment of the estimated liability is not required to avoid a late filing penalty. However, you will still be subject to interest charges and possible penalties on taxes due after April 15.
Interest and penalty for underpayment. If, on filing Form 4868, you pay less than the balance of the final tax you owe, you will be charged interest on the unpaid amount. If the tax paid with Form 4868, plus withholdings and estimated tax payments during the previous year, is less than 90% of the amount due, you may also be subject to a late-payment penalty (equal to 1/2 of 1% of the unpaid tax per month), unless you can show reasonable cause.
When you file your return within the extension period, you attach a duplicate of Form 4868 and include the balance of the unpaid tax, if any.
While the extension is automatically obtained by a proper filing on Form 4868, the IRS may terminate the extension on 10 days' notice to you.
If you cannot pay the tax due by the August 15 extension date, you should file your return and attach Form 9465 to request an installment arrangement. On Form 9465, you may request a monthly payment plan. The IRS will inform you within 30 days if your proposed payment plan is accepted.
If paying the tax due would cause you to suffer a severe hardship you may apply for a special payment extension on Form 1127. This extension is generally limited to six months. Even if the IRS allows the extension, you will still owe interest on the late payment.
Filing extensions beyond August 15. Filing extensions beyond the automatic four-month period are allowed only if you file Form 2688 and show good cause, such as illness of yourself or a family member, or lack of information returns, such as a Form W2 or Form 1099, needed to complete your return. Form 2688 must be filed before the end of the original four-month extension period. If the IRS agrees to your request, an additional two-month filing extension will be allowed, until October 15.
Electronic filing simply involves the transmission of data on your return from the computer of a tax preparer to an IRS computer. Subscribers to online services may be able to file electronically from their personal computers. The IRS acknowledges receipt of your return within two work days from the time of transmission. For electronic filing, you must use an authorized service. Many tax preparers now offer this service. You also fill out and sign Form 8453 (U.S. Individual Income Tax Declaration for Electronic Filing) to authorize the electronic transmission. When filing jointly, both you and your spouse must sign the form. If you report salary income, Forms W2 are attached to Form 8453, which is mailed to the IRS.
Electronic filing offers a faster refund, a check mailed within three weeks or a direct deposit to your bank account. You authorize a direct deposit by writing your savings or checking account number and the "routing transit number" of your bank on Form 8453. The routing transit number is the electronic mailing address of your bank and directs the refund to the correct account. The number is on your checks or other account statements. Before naming a bank, first ask if it accepts direct deposits and what its conditions are for receiving a deposit.
If you file electronically and owe taxes, you must pay by mail. In this case, you file Form 1040V (Payment Voucher) with your payment before April 15.
Refund anticipation loans. An electronic tax filing service may offer refund anticipation loans. These are loans on expected refunds from lenders affiliated with the electronic filing service. This service is strictly an agreement between you and the preparer. The IRS is not a party to the arrangement. Before agreeing to such a loan, consider the additional cost and whether it is worthwhile considering the short refund payment period.
Where To Send Your Return
If you are mailing your return to the IRS, address the envelope containing your return to the Internal Revenue Service Center for the area where you live. No street address is needed. If your tax package includes a pre-printed address label and envelope, use them.
ALABAMA-Memphis, TN 37501
ALASKA-Ogden, UT 84201
ARIZONA-Ogden, UT 84201
ARKANSAS-Memphis, TN 37501
CALIFORNIA-File with the IRS Service Center at Ogden, UT 84201, if you live in the counties of Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Glenn, Humboldt, Lake, Lassen, Marin, Mendocino, Modoc, Napa, Nevada, Placer, Plumas, Sacramento, San Joaquin, Shasta, Sierra, Siskiyou, Solano, Sonoma, Sutter, Tehama, Trinity, Yolo, and Yuba. All other California residents file at Fresno, CA 93888.
COLORADO-Ogden, UT 84201
CONNECTICUT-Andover, MA 05501
DELAWARE-Philadelphia, PA 19255
DISTRICT OF COLUMBIA-Philadelphia, PA 19255
FLORIDA-Atlanta, GA 39901
GEORGIA-Atlanta, GA 39901
HAWAII-Fresno, CA 93888
IDAHO-Ogden, UT 84201
ILLINOIS-Kansas City, MO 64999
INDIANA-Cincinnati, OH 45999
IOWA-Kansas City, MO 64999
KANSAS-Austin, TX 73301
KENTUCKY-Cincinnati, OH 45999
LOUISIANA-Memphis, TN 37501
MAINE-Andover, MA 05501
MARYLAND-Philadelphia, PA 19255
MASSACHUSETTS-Andover, MA 05501
MICHIGAN-Cincinnati, OH 45999
MINNESOTA-Kansas City, MO 64999
MISSISSIPPI-Memphis, TN 37501
MISSOURI-Kansas City, MO 64999
MONTANA-Ogden, UT 84201
NEBRASKA-Ogden, UT 84201
NEVADA-Ogden, UT 84201
NEW HAMPSHIRE-Andover, MA 05501
NEW JERSEY-Holtsville, NY 00501
NEW MEXICO-Austin, TX 73301
NEW YORK-New York City and counties of Nassau, Rockland, Suffolk, and Westchester-Holtsville, NY 00501; All Other Counties-Andover, MA 05501
NORTH CAROLINA-Memphis, TN 37501
NORTH DAKOTA-Ogden, UT 84201
OHIO-Cincinnati, OH 45999
OKLAHOMA-Austin, TX 73301
OREGON-Ogden, UT 84201
PENNSYLVANIA-Philadelphia, PA 19255
RHODE ISLAND-Andover, MA 05501
SOUTH CAROLINA-Atlanta, GA 39901
SOUTH DAKOTA-Ogden, UT 84201
TENNESSEE-Memphis, TN 37501
TEXAS-Austin, TX 73301
UTAH-Ogden, UT 84201
VERMONT-Andover, MA 05501
VIRGINIA-Philadelphia, PA 19255
WASHINGTON-Ogden, UT 84201
WEST VIRGINIA-Cincinnati, OH 45999
WISCONSIN-Kansas City, MO 64999
WYOMING-Ogden, UT 84201
Foreign Country: U.S. citizens or dual-status aliens and those filing Form 2555, Form 2555EZ, or Form 4563, even if you have an A.P.O. or F.P.O. address -- Philadelphia, PA 19255
A.P.O. or F.P.O. addresses -- Philadelphia, PA 19255
PUERTO RICO (or if excluding income under Section 933) -- Philadelphia, PA 19255
VIRGIN ISLANDS-Nonpermanent residents file with the IRS Service Center in Philadelphia, PA 19255; permanent residents file with the V.I. Bureau of Internal Revenue, Lockharts Garden No. 1A, Charlotte Amalie, St. Thomas, VI 00802
GUAM-Nonpermanent residents file with the IRS Service Center in Philadelphia, PA 19255; permanent residents file with the Department of Revenue and Taxation, Government of Guam, 378 Chalan San Antonio, Tamuning, GU 96911
AMERICAN SAMOA-Philadelphia, PA 19255
Calling the IRS About Your Refund
You can call the IRS to check on the status of an expected refund. When you call the IRS automated phone service, you must provide the Social Security number shown on the return (or the first Social Security number if you filed jointly), filing status, and the amount of the refund.
The general IRS phone number is 1-800-829-4477. However, in the following areas, you must dial a different number, using the local area code.
Arizona, Phoenix: 640-3933;
Any late changes to these numbers will be in the Supplement.
Keeping Tax Records
Tax saving requires keeping records. These records will help you to figure your income and deductions and will serve as a written record to present to the IRS if your return is audited.
Make a habit of jotting down deductible items as they come along.
Keep a calendar or diary of expenses to record deductible items.
Keep a file of bills. This can be an ordinary folder in which you arrange your bills and receipts alphabetically. This will remind you of deductible items and provide you with supporting evidence to present to the IRS if audited.
Use your checkbook stubs as a record. If you own a business, you must keep a complete set of account books for it.
IRA records. If you make nondeductible IRA contributions, keep a record of both your nondeductible and deductible contributions. This will help you when you withdraw IRA money to figure the tax-free and taxed parts of the withdrawal. For this purpose you should also keep copies of Form 8606 and Form 5498; see Section 8.8.
Passive losses. If you have losses that are suspended and carried forward to future years under the passive loss restrictions (Section 10.13), keep the worksheets to Form 8582 as a record of the carry-forward losses.
Home mortgage interest. Keep your bank statements and canceled checks. If a loan secured by a first or second home is used to make substantial home improvements, keep records of the improvement costs to support your home interest deduction; see Section 15.5.
How long should you keep your records? Your records should be kept for a minimum of three years after the year to which they are applicable. Some authorities advise keeping them for six years, since in some cases where income has not been reported, the IRS may go back as far as six years to question a tax return. In cases of suspected tax fraud, there is no time limitation at all.
Keep records of transactions relating to the basis of property for as long as they are important in figuring the basis of the original or replacement property. For example, records of the purchase of a residence or improvements must be held as long as you own the house.
As mentioned on page 627, if you have made any nondeductible IRA contributions, records of IRA contributions and distributions must be kept until all funds have been withdrawn. Similarly, you should save mutual-fund confirmations or other records showing reinvested dividends and cash purchases of shares; these are part of your cost basis and will reduce taxable gain when you sell shares in the fund.
Finally, if you make taxable gifts of property (above the annual gift tax exclusion, see Section 33.1), save all records of appraisals and other valuation information concerning your gifts. The IRS could try to revalue post-1976 taxable gifts for purposes of computing estate tax liability at your death; the Tax Court has upheld IRS authority to revalue.
Tax Return Preparers
Choosing a Tax Return Preparer
There are two phases in preparing your tax return: (1) collecting your tax data and (2) converting that data into entries on your tax return. You must perform the first step yourself, as discussed at page 625. Once this is done, the second step of preparing your return may not be troublesome, especially if your return merely requires several entries on Form 1040A or Form 1040EZ. If you think tax return preparation is troublesome, or if you do not have the time to prepare your return, ask acquaintances about their knowledge and experience with qualified tax preparers in your area. If they are satisfied, you may want to contact their recommendations. If you cannot get recommendations, visit the offices of established franchised tax preparers.
Fees for tax return preparation depend on the complexity of the return to be filed and the preparer's professional standing. A preparer is not necessarily a trained accountant. Shop around; visit offices of preparers in your locality. This way you will get a first-hand idea of the cost of services. A preparation fee of a single form, such as Form 1040A or Form 1040EZ, may be around $50. Fees will be higher for more complicated returns.
Finally, do not rely on a preparer for tax planning advice. A person who can prepare a return may not have the experience or training to give tax planning advice. Consult a qualified professional, such as an accountant, CPA, or tax attorney, who will charge more for services than a person who merely prepares returns during the tax season.
If you are concerned about a possible IRS audit of your return, consider hiring a preparer who is qualified to represent taxpayers at an IRS audit. Attorneys or CPAs automatically qualify to practice before the IRS because of their professional licenses. Persons who are not CPAs or attorneys may practice before the IRS as enrolled agents after passing an IRS examination or after completing five years of audit-level service as IRS employees. Enrolled agents are also required by IRS regulations to complete continuing education courses every year.
Tax preparers are subject to IRS regulations. They may be subject to penalties for understating the tax on a return or failing to keep proper records. Anyone who prepares a return or refund claim for a fee is considered a preparer under the tax law. When more than one person works on the return or claim, each schedule or entry is reviewed separately to determine the preparer of that schedule or item. A practitioner who gives advice directly relevant to a determination of the existence, characterization, or amount of an entry on a return is considered the preparer of that item.
A practitioner who prepares entries on a return that affect entries on the return of another taxpayer may also be considered the preparer of the other return if the entries are directly reflected on the other return and constitute a substantial portion of that return. For example, a practitioner preparing a partnership return may be considered the preparer of a partner's return if the entries that are picked up from the partnership return constitute a substantial portion of the partner's individual tax return. Regulations provide tests for determining whether a part of a return is considered substantial. Under the regulations, an entry is not considered substantial if it is (1) less than $2,000, or (2) less than $100,000 and also less than 20% of adjusted gross income.
You are not a preparer if you merely type or reproduce a return or claim, or prepare a return for your employer or an officer of your employer or a fellow employee.
A $250 penalty may be imposed on a preparer for a tax understatement if: (1) the preparer knew (or reasonably should have known) that the understatement was based on a taxpayer position that did not have a realistic possibility of being sustained on its merits; andž(2) the taxpayer position was frivolous or, if not frivolous, was not adequately disclosed. If the preparer can show good faith and a reasonable cause for the understatement, the $250 penalty will not be imposed. If a tax understatement is willful, or due to reckless disregard of IRS rules, a $1,000 penalty may be imposed; the penalty is $750 if the $250 penalty also applies to the return.
According to the IRS, a taxpayer position has a "realistic possibility" of being sustained on its merits if a person who is knowledgeable in the tax law would conclude, after a well-informed analysis, that there is at least a one-in-three likelihood that the position will be sustained.
For purposes of the $250 or $1,000 penalty, IRS regulations provide that only one person associated with a firm is considered to be the preparer of the return. The practitioner who signs the return is considered to be the preparer. If none of the persons considered to be preparers under IRS rules signs the return, then the person with overall supervisory responsibility is treated as the preparer for tax penalty purposes.
Note: a non-signing preparer may also be subject to a $1,000 penalty for knowingly aiding and abetting the understatement of tax liability on a return ($10,000 for corporate returns).
Preparers must satisfy the following requirements:
Retain a record of the name, Social Security number, and place of work of each preparer whom he or she employs. The records must be kept for three years following the close of the return period and must be made available for inspection upon request of the district director. There is a $50 penalty for each failure to keep and make available a proper record and a $50 penalty for each required item that is missing from the record. The maximum penalty for any return period is $25,000.
Furnish a completed copy of the return or refund claim to the taxpayer not later than when it is presented to the taxpayer for signature. There is a $50 penalty for each failure, up to a maximum of $25,000, for documents filed during any one calendar year.
Keep for three years and have available for inspection by the IRS a completed copy of each return or claim prepared, or a list of the names and identification numbers of taxpayers for whom returns or claims were prepared. A $50 penalty is imposed for each failure, up to a maximum of $25,000, for any return period. A preparer who sells his or her business is not relieved of the requirement of retaining these records.
Sign the return and include his or her identifying number or the identifying number of his or her employer. A $50 penalty is imposed for each failure, up to a maximum of $25,000, for documents filed during any calendar year. Where more than one practitioner has worked on a return, the individual with primary responsibility for overall accuracy must sign the return.
The penalty for failure to meet these four requirements may be avoided by showing reasonable cause for the failure.
Tax preparers are subject to a $500 penalty if they endorse or negotiate a refund check issued to a taxpayer whose return they have prepared. Business managers for athletes, actors, or other professionals who prepare their clients' tax returns and handle their tax refunds may also be subject to the penalty. To avoid the penalty, the manager must act only as an agent in depositing the client's refund check.
In addition to the penalties imposed, the IRS may also seek to enjoin a preparer from engaging in fraudulent or deceptive practices or from acting as an income tax return preparer. The IRS may also seek an injunction against a preparer for "aiding and abetting" a taxpayer to underpay tax. A list of enjoined preparers is published by the IRS in the Internal Revenue Bulletin.
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