Good news! The chance you’ll need an IRS tax attorney because you’re being audited isn’t that great. You have about the same chance of dying in a motor vehicle accident (1:100). In fiscal year 2010 (tax year 2009), the IRS audited 1.1% of the more than 142 million returns filed the year before, but for taxpayers making less than $200,000, the rate dropped a bit to about 1.0%.

However, if you’re in a higher income category, you have more reason to worry, even if you keep a tax attorney on retainer. It seems a higher income is an automatic audit trigger. The tax audit rate of those with incomes higher than $200,000 was 2.7%, and for those earning more than $1 million, the audit rate jumped to 8.4%. Why? Finding a 15% mistake on someone making $40,000/yr has a much different payout than someone making $4,000,000.

Many IRS audits are relatively simple “correspondence” audits. It’s that letter in a plain envelope that you dread and yes, I’ve gotten them – actually I’ve gotten several. Eight years ago I was a part owner in a very successful lumberyard and we were on the IRS watch list I guess. No one likes to get a letter from the IRS, but it’s probably less nerve wracking than a tax agent knocking on your door. I’ve been through that too … on a Sunday morning with 3 agents in dark suits and sunglasses knocking on the door at 6:00AM. Not fun. More than 1 million of the almost 1.4 million audits last year were correspondence audits, while about 310,000 were field audits.

Chances of being audited

Source: IRS and BusinessWeek

How a return is selected for an audit

Just like your credit score, you also have an IRS “score,” called the Discriminate Function Score (DIF). Based on a sample set of thousands of returns, the IRS determines what an average range and a valid range for, say, the amount of charitable contribution deductions claimed by a person earning $50,000/yr. Then, a taxpayer making that income level who claims a much higher deduction will get a higher DIF Score, and that taxpayer’s audit probability goes up.

That system only finds discrepancies with deductions; it doesn’t (can’t? … yet?) find someone who is under-reporting income. So, the IRS also examines certain types of businesses … especially cash businesses.

File BOTH your personal and business taxes with TurboTax and get the maximum refund you’re due!

The IRS estimates that up to 15 percent of the $1.9 trillion reported each year (that’s $290 billion+) goes unreported. As a result, in addition to high DIF scores, the tax agency focuses on cash businesses, such as restaurants, gas stations, house painters, flea market peddlers, domestic housekeepers, and hair salons. If the business primarily accepts cash as payment, it’s probably in the IRS’s crosshairs.

For small-business owners who receive a 1099, this is less of an issue, as the IRS can check what the taxpayer reports against the 1099 filed by the business that paid the money. In that situation, the IRS has a record of all your income.

Never be afraid to take a legitimate deduction

If you have a legitimate deduction and the paperwork to support it, take it. Don’t be intimidated into letting a deduction go by the wayside just because you fear an audit.

Your best bet is to always be honest and truthful when completing your tax return … even if what you’re reporting is outside of the norm.

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Since I started this blog in 2007, I’ve spend a lot of time and energy writing about the dangers of irresponsible credit card use. I fought many personal battles with those little pieces of plastic and while I’m still wary (with good reason), credit CAN be used responsibly. In many cases, you may actually be better off paying with credit over debit. There are a lot of ways that credit cards come out on top.

Good reasons to use your credit card

1. Cash Back Programs

If you sign up for the right card, you can earn anywhere from 1-5% back on your purchases. Best choice in my opinion? The Discover More Card.

2.  Frequent Flyer Miles

Virtually every airline has at least one credit card. Cardholders can rack up frequent flyer miles at varying rates. Many, like the Southwest Airlines Rapid Rewards® Card from Chase offer a substantial signup bonus to get you started on your way to a free airline ticket. The Southwest card even gives you a birthday present of 3,000 bonus miles each year on your birthday – equal to $50 towards their Wanna-Get-Away Fare.

3. Points for whatever

Many card rewards work on a point system where you earn points per dollar spent. When you reach a certain point threshold, you can redeem your points for gifts, travel, hotels, or something from their catalog. A good choice in my opinion is the American Express Premier Rewards Gold Card.

4. Safety

Paying with credit cards can make it easier to avoid fraud. When your debit card is used fraudulently, the money is missing from your account instantly and may take a while to get back unless you deal with a very reputable bank like PerkStreet. Any scheduled payments or checks may bounce, causing NSF’s and making your creditors (and you) very unhappy.

By contrast, if your credit card is used fraudulently, you won’t be out any cash – you just notify your credit card company of the fraud and the credit card company resolves it.

5. Holding onto cash

When you make a purchase with your debit card, your money is gone instantly. When you make a credit card purchase, your money stays in your checking account until you pay your credit card bill (hopefully in full). There are two advantages: one, if you pay your credit card from an interest bearing checking account and earn interest on your money during the grace period, the extra interest is yours to keep. Two, when you pay with your card, you don’t have to watch your bank account every day to make sure you’re not overdrawn.

6. Insurance

Most credit cards automatically come with a host of consumer protections that you may not realize you have, such as rental car insurance, travel insurance, and product warranties that may exceed the manufacturer’s warranty.

7. Easier Acceptance

Despite television and radio guru claims, certain purchases ARE more difficult to make with a debit card. Try renting a car or booking a hotel room and you’ll almost always have an easier time with a credit card. Rental car and hotel companies prefer credit cards because it’s easier to charge customers for damages to a car or a room with a credit card. Using a debit card may result in the company putting a hold of several hundred dollars against your checking account to cover those just-in-case events. Also, when traveling in a foreign country, many merchants won’t  accept your debit card, even when it has a  bank or credit card company logo on it.

8. Building Credit

If you have no credit or if you’re trying to improve a poor credit score, using a credit card responsibly will help build your credit score because credit issuers report your payment activity to the credit bureaus. Debit card use doesn’t appear anywhere on your credit report. You can find some great choices for those needing to rebuild their credit on my Credit Card Information page.

Not everything is rainbows, unicorns, butterflies, and sunshine in credit card land. There are fees, there is the potential for late charges, there is the potential for interest charges if you don’t pay your balance in full each month. Many of us abuse them and end up in high interest debt then fight for years to get out of it.

But if you can manage yourself and use your card responsibly (aka like an adult), there are a lot of benefits to using your credit card.

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

Many of these tax mistakes are easily avoidable if you use Turbo Tax or H&R Block to prepare your taxes. I’ve personally used H&R Block for 13 years … this year will be my 14th. I’m planning to do my taxes this year with both sets of software, just to see if one works better for me. I’ll be sure to report my findings.

It’s easy to make a lot of these tax mistakes. We’re busy and our lives are taxing enough already (pardon the pun). When tax time rolls around, we can get in a big hurry to get it over with and in our rush, make a few mistakes. Here’s a list you can reference to make sure you don’t delay your refund or wind up paying penalties, interest, or fees.

1. Failing to report forgiven debt as income. Companies that cancel debt report it to the IRS on Form 1099-C and you’ll have to pay taxes on it.

2. Failing to report all sources of income. The lucky break that put a little jingle in your pocket or a new iPad in your mailbox is taxable as income too. Forgotten income trips up a lot of people.

3. Falling for a tax break scam. Just because some guy on the radio (or even in a blog article) says you can deduct something doesn’t mean it’s so, check and make sure.

4. Failing to understand IRA rules. They are complicated! Get sound advice from a respected expert when it comes to your IRA.

5. Failing to use the right status. If you’re married and filing separately, make sure you don’t check married filing jointly.

6. Failing to report debt paid by an employer. If your employer paid your student loan, that’s income according to the IRS.

Get more information on a provate student loan through a Credit Union HERE!

7. Falling for the unethical tax preparer. You don’t want a tax preparer that is willing to push the envelope.

8. Failing to file altogether. Kind of the most basic mistake, I know, but tens of thousands of people “forget” to file their taxes. The statute of limitations expires after three years if you’re owed a refund, but NEVER expires if you owe.

9. Failing to realize that one spouse can be forced to pay another’s tax bill. If one spouse owes a bill for the past year and the other is due a refund, count on the IRS taking the refund to pay the outstanding bill.

10. Failing to read your entire return to check for accuracy. It is ultimately up to you to make certain everything is accurate. Double and triple check your return. If you use Turbo Tax or H&R Block, you shouldn’t have this problem.

11. Failing to file IRS Form 8822 (change of address) when you move. You’re still liable for any notices sent to your old address.

12. Failing to write your name and SSN on each form and schedule you send the IRS. If one page gets detached, it can be easily put with the correct return if your name and SSN is on it.

13. Failing to have written documentation for your charitable donations. The IRS is keen on this one. Any legitimate charity will willingly give you a receipt. If nothing else, your cancelled check may suffice.

14. Failing to maintain accurate records for your travel and automobile expenses. The IRS wants to see daily entries for your mileage and travel expenses. Don’t just list “500 miles – business” and expect that you’ll survive an audit.

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15. Failing to file IRS Form 8829 if you’re claiming part of your home as a home office deduction. This deduction is highly audit-flagging anyway so make sure you have the proper documentation.

16. Failing to have a written agreement when you and your spouse have legally separated. Until you’re legally divorced, the money you send to your spouse isn’t deductible because it technically isn’t alimony.

16. Failing to deduct job search costs. The cost associated with searching for a job within your industry can be deductible, including copying your resume, travel for interviews, and The Inner View of Your Interview.

17. Falling for the refund anticipation loan. Waiting just a few days to get your refund will save you an unbelievable amount of fees that come with refund anticipation loans.

18. Falling for the ease of paying with a credit card. It’s easy to be sure, but even if you pay it off immediately, you’ll pay the 2.5 percent fee charged by the credit card company … cause the IRS certainly isn’t going to pay it.

19. Failing to correctly handle the “Making Work Pay” tax credit. This credit ($400 for individuals; $800 for couples) is filled with quirks sure to trip up taxpayers and tax preparers alike.

20. Failing to accurately calculate the Earned Income Tax Credit (EITC). The EITC gives low income families and individuals a tax credit for the dependents they support, but many people incorrectly calculate the credit they’re owed.

21. Failing to check your math! Another no-brainer, but the IRS gets thousands of returns each year that transpose numbers or that just don’t add up. If you use Turbo Tax or H&R Block, you shouldn’t have this problem.

22. Failing to use the correct tax table when calculating your taxes. If you’re still preparing your returns by hand, make certain you use the correct table. If you use Turbo Tax or H&R Block, you shouldn’t have this problem.

23. Failing to send in the proper documentation. Many returns will require documentation be sent to the tax authorities. Make sure you sent what’s needed EXACTLY.

24. Failing to sign and date your return. Another rookie mistake.

25. Failing to put the correct bank account routing numbers on a direct deposit request. Your refund could be in limbo for a long time if you don’t use the correct bank account numbers.

26. Failing to send payment. If you owe money, always send it in. If you can’t – call the IRS and set up some payment arrangements. You won’t get out of paying your taxes!

27. Failing to amortize any mortgage points paid over the life of a refinance. Mortgage points are deductible in the year they’re paid, unless you refinance. That’s a whole different story.

28. Failing to get your taxes filed on time. Timing is everything. Correct timing is critical.

29. Failing to make a copy of your return for YOUR records. If the IRS sends you a letter asking about an entry on your return, you better have a copy!

30. Failing to make certain the proper forms are filled out and sent in. No matter what, the onus is on you to send in the correct forms that are correctly filled out.

31. Failing to double check your social security number for accuracy as well as the social security numbers of your dependents. Read them aloud and make certain they’re correct. This trips up thousands of people every year.

32. Failing to include all people who are dependent on your income. If you support someone, you could call them a dependent.

33. Failing to file as “Head of Household” even if you’re single providing you have at least one dependent living with you. Using this filing status could result in a bigger refund.

34. Failing to check if “Married filing separately” is more beneficial than “joint.” Everyone’s tax situation is unique and you should make certain you use the correct status.

35. Failing to send in your W-2’s and 1099’s. The taxing authorities will want these so be sure to send them in with your return.

36. Failing to claim additional standard deductions if you’re blind or over 65. The government gives you an additional benefit if you’re in these categories.

37. Failing to sign the check you send to the IRS. Another seeming rookie mistake but many people get in a hurry or think they’ll delay having to make payment by not signing the check. The IRS won’t fall for it.

38. Failing to write your social security number on your check sent to the IRS. If that check falls out of the envelope, having your SSN on it will insure it’s properly credited to you.

39. Failing to check all 1099’s for accuracy. Just because you received a 1099 doesn’t mean it’s accurate. Check it against your own records.

40. Failing to claim a credit for any overpaid social security taxes if you worked for more than one employer. You can actually double pay your social security taxes so make sure that if you did, you get a credit for it.

41. Failing to accurately account for your state tax refund. State income taxes are deductible on your federal return. If you received a refund, that amount becomes taxable again since it artificially lowered your federal taxes.

42. Failing to accurately account for a refund of interest paid on a mortgage in an earlier year. Chances are very good you deducted that mortgage interest, so just like with your state income tax refund, it artificially lowered your taxes and you’ll have to make it up.

43. Failing to subtract assessments from your real property tax deduction. Assessments used to improve community property (if included in your property tax bill) are not allowable deductions.

44. Failing to get a spouses signature on a tax return. Both spouses must sign!

45. Failing to subtract your non-taxable social security benefits when your income falls below a certain level. If you’re below a certain income level, a portion of any social security benefits you receive isn’t taxable.

46. Failing to fill out IRS Form 8606 Nondeductible IRA Contributions for your contribution to an IRA even if you don’t claim any deduction for the contribution. The IRS wants to know what happened.

47. Failing to recheck your basis in securities you sold during the year (especially mutual funds). Automatically reinvested dividends and capital gains from your investments increase your basis in the fund and reduce its gain or increase its loss.

48. Failing to deduct front end loads or purchase fees for your mutual fund investments. These fees reduce your investment returns and are deductible.

49. Falling for the “forced savings” plan by overpaying your taxes all year just to get a bigger refund. Why give the government an interest free loan all year? Accurately pay your taxes all year and use the money yourself.

50. Failure to use Certified Mail when you mail your return to the IRS. That’s the best way to make sure your return was received. For additional peace of mind, send it “Return Receipt Requested.”

51. Failure to write legibly. Have someone else look at your handwritten return to make sure your handwriting is legible. Why tick off an IRS employee?

52. Failure to use enough postage to get the return to the IRS on time. Don’t think one stamp will do it. Have the Post Office weigh it to be sure. If your return is late for lack of postage, you’ll incur a penalty.

53. Failure to report and pay domestic payroll taxes for a nanny, in-home caregiver, or housekeeper. If you employ someone in this capacity, better make sure the proper taxes are paid. It isn’t just politicians that get caught.

54. Failure to figure if you’re liable for the Alternative Minimum Tax (AMT). Not everyone is liable, but if you are, you’ll be in deep water if you don’t pay it.

55. Failure to mail your return to the correct address. Again, it’s up to you to insure you put the correct mailing address to the IRS. Your return will probably make it anyway … eventually … but it could be late if the address isn’t correct.

56. Failure to itemize when it’s beneficial. Too many people use the 1040-EZ form and miss out on perfectly legal deductions as well as a larger refund. If you use Turbo Tax or H&R Block, you shouldn’t have this problem since both use an interview method to determine which form you should use.

57. Claiming ineligible dependents. I’ve actually seen people pass around SS numbers to friends in order to help them claim dependents that weren’t actually theirs. This is fraud and won’t be tolerated by the IRS.

You still here? Wow!

There are many, many ways to miscalculate your taxes and whether you over-pay or under-pay, they’re still inaccurate and guess what? You either lose up front or lose eventually either way, so insure that your taxes are accurate, your i’s dotted and your t’s crossed.

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

An Insurance Pothole?

Potholes. The nemesis of drivers everywhere. They appear when you least expect them and they can do some real damage to your tires, your wheels, and even the frame of your vehicle. Potholes need to be filled quickly, before they get larger and damage more vehicles.

Insurance potholes act in the same way. They pop up when you least expect them and certainly when you don’t need them. When they rear their ugly heads they can do some real damage to your assets – especially your cash assets. Insurance potholes need to be filled too. And just like potholes in the road, it’s easy to put off fixing them. But procrastination with insurance potholes is a REALLY bad idea.

One of the biggest insurance potholes is a “gap” in coverage.

What is a “gap” in coverage? Other than a time gap, where you allow a non-payment of insurance premiums to cause your policy to lapse or go dormant, a gap in coverage occurs when what you want to insure is valued at more than the insurance you’ve purchased.

Car Insurance.

State law minimum requirements for car insurance vary from state to state but usually they’re very, very low. Many states only require you to purchase as little as $10,000 in property damage coverage per accident. So, if you have a car accident and it is deemed to be your fault, make sure the other vehicle isn’t worth more than $10,000. That means don’t hit an car less than one or two years old, no upscale European or Japanese models, no Cadillacs, Lincolns, or Corvettes. Think you can pull that off? If you have any doubts, you have a gap in coverage.

Life Insurance.

Far too many people believe that the younger crowd doesn’t need any life insurance but I disagree. Even if you don’t have dependents, the chances are very good you’ll have some final expenses associated with your untimely death .. should it occur. Do you really want your mother or father or other family members to have to face telling the hospital or your creditors that there isn’t enough money to pay them off? Do you really want your parents or family to have to shoulder the entire bill associated with your funeral? I know I didn’t. That’s why I bought a minimal policy, even before I had children, just so my wife wouldn’t face that ordeal.

Homeowner’s Insurance.

Wait a minute! Isn’t your home insured for it’s replacement value? Where could there be a gap in that insurance? My answer: how much is your jewelry insured for? How ‘bout your electronics? What about any antiques, guns, furs, or other of those items typically capped at a ridiculously low amount on homeowners insurance policies? If you have those items included in your homeowners insurance policy as an additional rider, you don’t have that gap in coverage.

Has your home increased in value since you bought your policy? If it has, you may be underinsured. If your home has actually decreased in value, you may be over insured and need to decrease it.

Click HERE to get started evaluating the gaps in your insurance coverage with InsureMe.com

Renter’s Insurance.

You rent your apartment or house? You need renter’s insurance. Without it, if anything happens to the dwelling and you lose your personal belongings, you’re out of luck. Renter’s insurance is cheap.

Medical Insurance.

I know the Federal government is supposed to swoop down sometime in the near future and save us from the evil health care industry, but personally, I’m not holding my breath. Your gap in coverage with your health insurance may come in the form of a higher than standard deductible ($2,000 per person and up). If it is, a supplemental health insurance plan can close that gap and provide you with the necessary coverage so you’re not left holding a bill that’s much larger than you realized.

What do you do if you find a gap in coverage?

I’d recommend checking out InsureMe. When you fill out their simple form, you can get quotes from insurance agents without the hassle. InsureMe’s research shows that consumers save 20-40% by receiving multiple quotes and over 60% of consumers would recommend InsureMe to a friend!

Even if you don’t want to try InsureMe, give your regular insurance agent a call and schedule a time you can both examine your gaps in coverage and make sure they’re filled as soon as possible.

Photo by Heneghan

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

If you’re like me, you like to learn from the experience and wisdom of others. It’s much cheaper that way! When it comes to being an investor, few things can beat the knowledge you and I can absorb by reading books. Plus I just like to read.

Photo by jeffpearce

Five Books For Active Investors

The Intelligent Investor by Benjamin Graham. Graham was Warren Buffet’s professor and Buffet has declared that this book is “the best book on investing ever written.” Strong words from someone who’s used those investing strategies to make billions.

Payback Time or Rule #1 both by Phil Town. Town’s investment philosophy mirrors those of Warren Buffet and Ben Graham, that price and value are two different things. He shows you how to intensely scrutinize any business you invest in and how to make an educated guess about it’s value based on its past, present, and predicted future.

The Little Book That Beats the Market by Joel Greenblatt. The author’s private investment partnership, Gotham Capital, has produced 40 per cent a year returns over the past 20 years. The last time I checked, he was invested in only two stocks. 40 percent. Wow.

Irrational Exuberance by Robert J. Shiller. This Yale economist contends that emotion often determines prices in the stock market, resulting in prices that are often far higher or lower than values. Does anyone really believe that Yahoo was truly worth $500 billion in 1999?

One Up On Wall Street by Peter Lynch. This former manager of Fidelity Magellan Fund, the largest mutual fund in the world at one time, thinks you should be managing your own money. He wrote “The amateur investor has numerous built-in advantages that should result in outperforming the experts and the markets.”

Five Books For Passive Investors

How A Second Grader Beats Wall Street by Allan Roth. He believes you’re paying too much in fees, too much in taxes, and that the financial advisors you’re been using don’t have any idea where the market is headed. Our biases (and our financial planner’s biases) can cause us to lose big money over the long run. Invest in broad based ETFs or Vanguard funds and rebalance each year.

The Little Book Of Common Sense Investing by John Bogle. As the founder of the Vanguard Group, Inc., Boggle is THE guru of index investing, providing guidance to small investors in smaller and more direct terms than some of his other writings.

The Only Guide You’ll Ever Need for the Right Financial Plan by Larry Swedroe. In a easy-to-understand prose, Mr. Swedroe provides excellent information on the various types of equities, bonds, alternative investments, a valuable discussion on how to increase your tax-advantaged savings and important tips on asset location for maximum tax-efficiency.

Searching For Alpha by Ben Warwick. This is a great discussion of market efficiency versus stock picking from an active manager. This is a light-hearted book on a heavy subject that addresses such things as “the commonalities between catching monkeys in India and avoiding taxes on investments in the United States.” You want to read it now, don’t you?

The Wall Street Self Defense Manual by Henry Blodget. Though many people believe the author should be in jail because he was an insider and eventually was barred from the financial markets, no one knows more about how to spot a Wall Street scam than a former crook. His recommendation? “Diversify your assets, reduce your costs, and get out of the way.”

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.