Most citizens voluntarily file their tax returns and pay their taxes. Most people explain it by saying they want to pay their fair share. Others file to get a refund, claim a credit or avoid breaking the law.

There are times when normally law-abiding citizens fail to file. Why? IRS research shows that sometimes people don’t file in years their filing status changes, such as due to the death of a spouse or divorce. Emotional or financial reasons may cause a person to not file. Or it could simply be due to procrastination.

Unfortunately, failing to file a return creates additional problems. This is post was written to help taxpayers better understand the importance of filing past-due returns.

Your need to file is largely determined by your age, filing status and gross income. You can determine whether you needed to file in a prior year by checking the “Do You Have to File” section in the instructions of the Form 1040 for the year in question.

Why file a tax return?

Taxpayers are required by law to file an income tax return for any year in which a filing requirement exists.

There are numerous practical reasons to file tax returns. Important programs like federal aid to higher education require applicants to submit copies of tax returns to qualify for loans. Lending institutions also may require copies of filed returns for buying a home or financing a business.

And the filing of tax returns can have a tremendous impact on your future. A person’s lifetime earnings as reported to the IRS and the Social Security Administration are the basis for Social Security retirement and disability benefits as well as Medicare. Reported income is also the source for state benefits such as unemployment compensation and industrial insurance.

What happens if you do not file?

Not filing a federal tax return can be costly — whether you end up owing more or missing out on a refund. The IRS may also impose a wide range of civil and criminal sanctions on persons who fail to file returns.

If you owe tax and your return was not filed by the due date, including extensions, you may be subject to the failure to file penalty, unless you have reasonable cause for not filing. If you did not pay your tax in full by the due date for the return, not including extensions of time to file, you also may be subject to the failure to pay penalty, unless you have reasonable cause for your failure to pay. Additionally, interest is charged on taxes not paid by the due date; even if you have an extension of time to file. Interest is also charged on penalties.

The IRS continues to identify people who have a filing requirement but have failed to file a return.

By law the IRS may file a substitute return for you if you do not voluntarily file. A series of letters is first sent explaining the possible action IRS may take as part of the Substitute for Return Program. 

If you do not file a return or otherwise indicate disagreement such as by requesting to exercise your appeal rights, the IRS will file a basic return for you. An IRS-prepared return will not include any of your additional exemptions or expenses. The IRS will compute the tax liability and send you a bill for the tax that will also include interest and penalties.

If a substitute return has already been filed for you by the IRS, you should still file your own return to claim any additional items. The IRS will generally adjust your account to reflect the corrected figures.

What are the consequences of not filing a tax return?

Here are some things to consider:

• Failure to file penalty. If you owe taxes, a delay in filing may result in a “failure to file” penalty, also known as the “late filing” penalty, and interest charges. The longer you delay, the larger these charges grow. It may result in penalty and interest charges that could increase your tax bill by 25 percent or more.
• Losing your refund. There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.
• EITC. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file. The return must be filed within three years of the due date in order to receive the credit.
• Statutes of limitation.After the expiration of the refund statute, not only does the law prevent the issuance of a refund check, it also prevents the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid.On the other hand, the statute of limitations for IRS to assess and collect any outstanding balances does not start until a return has been filed.In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.

What should you do?

Regardless of your reason for not filing, file your tax return as soon as possible. You can contact a tax professional or the IRS for help with filing delinquent returns.

If you are unable to fully pay any tax due on the late returns, do not let this prevent you from filing as payment options may be available. For more details, ask your tax professional or an IRS representative.

Filing tax returns and paying the correct amount of tax is good citizenship. Conscientiously discharging this duty contributes to our nation’s well being and provides peace of mind. And failing to file returns can jeopardize a family’s financial security and future.

One of the top questions I receive from pretty much every client is how do I not get audited by the IRS. Typically there is no straight answer but be truthful and cautious. But now comes news from the most unlikely of sources — the IRS itself — that your chances of being audited are 1 in 100 if you follow one simple rule:Show an income under $200,000. IRS enforcement numbers released last Tuesday show that returns under that amount have a 1 percent chance of getting audited, according to a brief on msnbc.com. Show an income of $200,000 and above, and your chances of an audit nearly triple, to about 3 percent. And if you’re Joe or Jane Millionaire, then prepare to follow the rock ‘n’ roll advice of John Fogerty and make the house look like a rummage sale. Your audit chances jump to more than 6 percent if your returns show earnings of $1 million or more.

You may wonder how else you can avoid an audit. I know, I know: I shouldn’t expect the IRS to hand over its entire playbook. But according to the Internet site WorldWideWeb Tax, certain characteristics could likely raise a red flag with auditors. These include:

* You have large amounts of itemized deductions on your tax return that exceed IRS targets.

* You claim tax shelter investment losses on your tax return.

* You have complex investment or business expenses on your tax return.

* You own or work in a business which receives cash and/or tips in the ordinary course of business.

* Your business expenses are large in relation to your income on your tax return.

* You have rental expenses on your tax return.

* A prior IRS audit resulted in a tax deficiency.

* You have complex tax transactions without explanations on your tax return.

* You are a shareholder or partner in an audited partnership or corporation.

* You claim large cash contributions to charities in relation to your income on your tax return.

* An informant has given information to the IRS.

If you’re at all like me, chances are none of these areas should cause you any concern.  But talk about news some of us can use. Like: “Girls Gone Wild” founder Joe Francis, who claims the IRS is out to get him.

www.TaxesPlusUS.com

When starting a new business one decision that is overlooked is choosing between cash or accrual. Below is a description of each type of accounting method. Consult your accountant when you have your first years tax return prepared.

Cash method

If you use the cash method of accounting, you record income only when you receive cash from your customers. You record an expense only when you write the check to the vendor. Most individuals use the cash method for their personal finances because it’s simpler and less time-consuming. However, this method can distort your income and expenses, especially if you extend credit to your customers, if you buy on credit from your suppliers, or you keep an inventory of the products you sell.

Accrual method

With the accrual method, you record income when the sale occurs, whether it be the delivery of a product or the rendering of a service on your part, regardless of when you get paid. You record an expense when you receive goods or services, even though you may not pay for them until later. The accrual method gives you a more accurate picture of your financial situation than the cash method. This is because you record income on the books when it is truly earned, and you record expenses when they are incurred. Income earned in one period is accurately matched against the expenses that correspond to that period, so you get a better picture of your net profits for each period.

Pros and cons

The cash method is easier to maintain because you don’t record income until you receive the cash, and you don’t record an expense until the cash is paid. With the accrual method, you will typically record more transactions. For example, if you make a sale on account (or, on credit), you would record the transaction at the time of the sale, with an entry to the receivables account. Then, when the customer pays their bill, you will record the receipt on account as another transaction. With the cash method, the only transaction that is recorded is when the customer pays the bill. If you are using computer software to do your accounting, this is probably not a big concern, since the computer program automates much of the extra effort required by the accrual method, such as QuickBooks.

Another issue to be considered is the accounting method you use for tax purposes. For convenience, you probably want to use the same method for your internal reporting that you use for tax purposes. However, the IRS permits you to use a different method for tax purposes. Some businesses can use the cash method for tax purposes. If you maintain an inventory, you will have to use the accrual method, at least for sales and purchases of inventory for resale.

We recommend the accrual method for all businesses, even if the IRS permits the cash method, because accrual gives you a clearer picture of the financial status of your business. You probably need to keep a record of accounts receivable and accounts payable anyway, so you are already keeping track of all the information needed to do your books on the accrual basis. If you are using a computer program, there really isn’t much extra effort involved in using the accrual method.

To begin with, there are certain threshold issues that apply to all business deductions.

* Appropriateness of the expense – was the expenditure ordinary and necessary for your business?

* Relation to a business activity – the IRS is keenly aware that taxpayers may be tempted to write off things as business expenses that are really nondeductible personal expenses. If the expense was only partly for business, you’ll need to allocate it between the business and personal portion.

* Do you have adequate records – in a tax audit, the IRS agent will ask you to show that the expense was in fact paid. This is where your recordkeeping routines come into play. If you have kept good records, proving your deductions won’t be a problem. Remember, on most tax matters, the IRS can require you to prove that your deduction (or other item on your personal or business return) is correct. If you can’t do this, the IRS will compute your tax liability based on its view of the question under dispute.

* What are some common deductible expenses – we provide a list of some of the most frequently used deductions, and some that you may have overlooked
* What are some common nondeductible expenses – while no list can be all-inclusive, we point out some items that are generally not deductible for most business owners.

Listed below are some commonly encountered items that usually won’t be allowed as a business expense deduction. In most cases, a deduction is denied for these items either because they are nondeductible personal expenditures, or because Congress specifically made them nondeductible.

Where noted, some of these items may qualify for other tax benefits (such as tax credits or recovery through depreciation).

• bar or professional examination fees
• capital expenditures (not fully deductible in the year placed in service, but yearly deductions are allowed to recover the cost of the item over a specified time period)
• charitable contributions or gifts by a business that’s not a C corporation (sole proprietors may deduct contributions on their individual tax returns, rather than on Schedule C).
• clothing, unless it’s protective equipment, or a uniform that would not be worn during non-working hours
• country club, social club, or athletic club dues
• commuting expenses
• estate tax (even if largely due to the ownership of a business interest)
• expenses, including interest, paid to generate tax-exempt income
• federal income tax
• fines and penalties incurred for violations of law, such as child labor violations, federal income tax penalties, traffic tickets, and penalties for overweight or over-length trucks.
• gift tax; inheritance tax
• gifts to employees that are valued at more than $25
• any portion of a gift to a business contact that is valued at more than $25
• hobby losses
• inheritance tax
• interest on indebtedness incurred by a business taxpayer to purchase life insurance coverage in excess of $50,000 on the life of any its officers, employees, or other person having a financial interest in the taxpayer’s trade or business
• interest on indebtedness incurred to purchase single premium life insurance contracts, or any life insurance contract under a plan of financing the purchase by withdrawing some or all of the yearly build-up in policy cash values
• job hunting expenses (for a new trade or business)
• life insurance premiums, if the business, or the business owner, is a direct or indirect beneficiary.
• lobbying expenses (appearances before legislative bodies and expenses to influence voters)
• partnership organizational expenses, unless amortization election made
• personal, living, or family expenses; however, certain interest, taxes, bad debts, medical expenses, theft or casualty losses, or charitable contributions may be deductible in whole or in part as an itemized deduction on your individual tax return
• political contributions, including tickets to political dinners
• tax penalty payments
• transfer taxes on business property

To help you decide whether a particular expense is likely to be deductible, we’ve provided a list of the most common business deductions.

List of common deductible expenses:

• advertising
• bad debts from sales or services (for those using accrual accounting)
• bank fees on business accounts
• car and truck expenses
• commissions and fees
• cost of goods sold
• deprecitation
• dues for trade associations and other not-for-profit, business-related organizations
• employee benefits
• gifts to customers, suppliers, etc.
• insurance (casualty and liability)
• interest
• legal and professional services
• meals and entertainment
• office expenses
• pension and profit-sharing plans
• rent or lease expense
• repairs and maintenance
• services performed by independent contractors
• supplies and materials (not included in cost of goods sold)
• travel expenses
• utilities
• wages of employees

If you don’t see an item you’re interested in on this list, check our list of common nondeductible expenses as well.

Owning a small business is not just another job. It’s a totally different lifestyle. You have to ask yourself whether you’re ready for a complete commitment to the success of your business. Just as importantly, you have to ask your partner, if you’re in a relationship, whether he or she is completely committed.

As a small business owner, you’re going to have less time for your personal life and you’ll probably be using much of what you own as collateral to raise money for the business. If you are willing to make those sacrifices, then let’s move on to some of the advantages and disadvantages of owning your own business.

Pros:

• You have the chance to make a lot more money than you can make working for someone else.
• You’ll be your own boss and make the decisions that are crucial to your business’ success or failure.
• You may be the boss of other people.
• You’ll have job security — no one can fire you.
• You’ll have the chance to put your ideas into practice.
• You may participate in every aspect of running a business.
• You’ll learn more about every aspect of a business and gain experience in a variety of disciplines.
• You’ll have the chance to work directly with your customers.
• You’ll be able to benefit the local economy, such as by hiring other people to work for you.
• You’ll have the personal satisfaction of creating and running a successful business.
• You’ll be able to work in a field or area that you really enjoy.
• You’ll have the chance to build real retirement value (for example, by selling the business when you retire).
• You’ll have the chance to put down roots in a community and to provide a sense of belonging and stability for your family.

Cons:

• You may have to take a large financial risk.
• You will probably have to work long hours and may have fewer opportunities to take vacations.
• You may end up spending a lot of your time attending to the details of running a business and less time on those things you really enjoy.
• You may find that your income is not steady and that there are times when you don’t have much income coming in at all.
• You may have to undertake tasks you find unpleasant, such as firing someone or refusing to hire a friend or relative.
• You may have to learn many new disciplines, such as filing and bookkeeping, inventory control, production planning, advertising and promotion, market research, and general management.

Special pros and cons of the home-based business:

• Your startup costs will be lower.
• Your operating costs will be lower than they would if you were renting space and paying utilities.
• Your commute will be shorter.
• If your location is unimportant to your business, you can theoretically live anywhere and still operate your business.
• You may be more flexible in your schedule if your business can be conducted at your convenience or outside “normal” weekday business hours.
• On the other hand, you’re much more vulnerable to interruptions from family members, neighbors, and door-to-door salespeople.
• You may have trouble attracting qualified employees.
• You may be less accessible to suppliers.
• You may have an image problem, although with the growing popularity of home businesses, that’s less common.
• You may run out of space at home if your business grows.

What are some other Pros and Cons you can think of? Feel free to leave comments.

Amortizing Your Startup Expenses

If you incur startup expenses, the IRS requires you to amortize and deduct the expenses over a period of at least 60 months, provided that you subsequently enter the trade or business to which the expenses relate. Expenses incurred after the business begins operation, however, are often deductible in the first year. Thus, it’s often a good idea to postpone some expenses until after your first customer arrives.

Which expenses must be amortized? The amortization only applies to expenses incurred after you decide to establish a particular business and before the business actually begins operation. It applies to expenses such as advertising; salaries and wages paid to employees who are being trained; travel expenses incurred in lining up prospective distributors, suppliers, or customers; and salaries and fees paid or incurred for executives, consultants, or similar professional services.

It does not, however, apply to expenses that would not be deductible if incurred after you start the business.

Please keep in mind there are additional rules that allow up to $5,000 to be deducted in the first year. For example, Company ABC was had start up expenses of $25,000. On the first years tax return the company is allowed to deduct up to $5,000 and $338.98 each additional year.

Importance of Good Records

Unless your business is accounting or bookkeeping, keeping financial records is probably not what you do best. Most likely, you’d rather spend your time selling your product or service. However, if you are going to run a successful business, accurate and timely financial information is a must. Here are some of the reasons why you need a good financial recordkeeping system:

• Monitoring the success or failure of your business. It’s hard to know how your business is doing without a clear financial picture. Am I making money? Are sales increasing? Are expenditures increasing faster than sales? Which expenses are too high based on my level of sales? Do some expenditures appear to be “out of control?”
• Providing the information you need to make decisions. Evaluating the financial consequences should be a part of every business decision you make. Without accurate records and financial information, it may be hard for you to know the financial impact of a given course of action. Will it pay to hire another salesperson? How much will another production employee cost? Is this particular product line profitable?
• Obtaining bank financing. A banker will usually want to see financial statements; a balance sheet. income statement, and cash flow budget for the most current and prior years, as well as your projected statements showing the impact of the requested loan. A banker may even want to see some of your bookkeeping procedures and documents to verify whether you run your business in a sound, professional manner.
• Obtaining other sources of capital. If your business has reached the point where you need to take in a partner, any prospective partner will want to become intimately familiar with your financial picture. If you need capital and are thinking of taking in an outside investor, you will need to produce a lot of financial information. Even your suppliers and other creditors may ask to see certain financial records. Such information may be produced by your outside accountant, but it is based on your day-to-day recordkeeping.
• Budgeting. All businesses should use a budget for planning purposes. A budget will help keep your business on track by forecasting your cash needs and helping you control expenditures. In addition, if you are seeking bank financing or other sources of capital, a banker or prospective investor will probably want to see your budget as evidence that your business is well planned and stable. You must have solid financial information to prepare a meaningful budget.
• Preparing your income tax return. Whether your business is a sole proprietorsship, partnership, or corporation, you must file an income tax return and pay income taxes. With good records, preparing an accurate tax return will be easier and you’re more likely to be able to do it on time. Poor records may result in your underpaying or overpaying your taxes and/or filing late (and paying penalties). If your accountant prepares your income tax return, poor records will almost certainly result in your paying higher accounting fees. If your business is a partnership, not only will you have to prepare a partnership tax return, but partnership return amounts will pass directly to the tax return of each partner. So your recordkeeping will directly affect the tax return of each partner.
• Complying with federal and state payroll tax rules. If you have employees, you are aware of the myriad rules and regulations relating to payroll taxes. Payroll tax deposits must be made according to strict deadlines. Late payment of payroll taxes results in severe, and unnecessary, penalties. Also, you must file a payroll tax return every quarter, which you must reconcile with the payroll deposits made during the quarter. Then at the end of the year, you are required to give your employees and the government W-2 forms, which must agree with your quarterly payroll returns. Sound bookkeeping practices will make compliance with all these payroll rules easy. Poor records will make it impossible.
• Submitting sales taxes. If you collect sales tax from your customers, good records will make it easy for you to compute the tax due and prepare the required reports.
• Distributing profits. If your business is a partnership, you will need good records to determine the correct amount of profits to distribute to each partner. If you are operating as a corporation, you must determine the company profits that you will be paying out as dividends to the shareholders.

Outsourcing can be one of the best decisions a business can make. Working with a third party virtual bookkeeping company has been a common thing even for large companies. Any company, whether small or large scale, has to manage accounting books in order to monitor the expenses, revenue, profits, taxes, sales figures and other financial aspects of a company.

Many small companies believe that it is necessary to handle bookkeeping all by them selves in order to cut costs. However, the downside of managing the accounting books yourself is that it will reduce your potentials of being able to focus on the development of your business. In fact, in the long run, you will be spending more. The time spent for analyzing debits and credits can be spent on other more important things. Allowing a professional to handle the bookkeeping task for you will save you time, effort and money. Virtual bookkeeping professionals are equipped with the skills to do the work faster and more efficiently.

The most common reason why companies outsource bookkeepers is to cut costs. Most companies look for a bookkeeping company that can deliver to them the kind of work that they expect at a reasonable value. Virtual bookkeepers are well-versed on business and accounting concepts. Since the company no longer has to hire an in-house bookkeeper, it means less training and hiring costs for the company. It also makes a company save on office space and equipments. Also, since the company will not be responsible for the medical benefits and other additional needs of the virtual bookkeeper, more savings are incurred.

Studies have shown that a company can actually save up to 50% from hiring a virtual bookkeeper than hiring an in-house bookkeeper. This gives a company more money to invest on other things for the growth of their business.

A telecommuting bookkeeping firm delivers a weekly or daily (according to your preference) reports of your company. When interpreted, these figures can point out to how the business is doing and the required steps to keep the business on track. These financial statements can provide essential information regarding the company’s liabilities, assets and profitability at a given period of time.

A bookkeeper who works for a good telecommuting bookkeeping company will be able to identify the competition and trends faced by a certain product in the market. A professional virtual bookkeeper can give the best advices on financial structures and how to lessen annual tax obligations and other expenses. Also, he/she should be able to identify any changes in customer preferences and behaviors to be able to determine timely and effective marketing strategies that will boost revenue and sales.

Every business should be able to preserve precise financial records to maintain transparency in all business dealings. It is mandatory for a company to comply with several government policies such as sales tax and income tax. Thus, instead of doing the bookkeeping task all by yourself, it would be wiser to pass on the burden to a competent bookkeeper.