Since we work on our taxes (usually) only once per year and even then many of us turn them over to professionals whether in the form of a tax accountant or a software program like TurboTax, our understanding and recollection of many of the terms and definitions used during tax time can become a little fuzzy.

I’ve been receiving a lot of questions on taxes via my contact page. Here is some information that I put together to help answer some of the most common questions about exemptions, dependents, and giving to charities.

What are tax exemptions?

Exemptions are legal ways to reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for qualified dependents. Each exemption allows you to deduct $3,700 on your 2011 tax return and $3,800 on your 2012 tax return.

What is a dependent?

A dependent is your qualifying child or qualifying relative for whom you provide more than 50% of their financial support. You must list the Social Security Number of any dependent for whom you claim an exemption. You generally can take an exemption for each of your dependents.

Can my spouse be my dependent?

No. Your spouse is never considered your dependent. If you file a joint return, you can claim one exemption for yourself and one for your spouse. But, if you’re filing a separate return from your spouse, you can claim an exemption for your spouse only if he or she had no gross income, is not filing a joint return themselves, and he or she wasn’t the dependent of another taxpayer.

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Do I have to file a tax return if I’m a dependent?

Maybe. If another person can legally claim you as a dependent, you may still have to file a tax return depending on your income, your marital status, any special taxes you owe, and any advance Earned Income Tax Credit payments you received. See IRS Publication 929, Tax Rules for Children and Dependents for more information on dependents and their requirements to file a tax return.

If someone else claims me as a dependent, do I still get a personal exemption?

No, you don’t. If someone else claims you as a dependent, you may not claim your personal exemption on your own tax return.

Who cannot be claimed as my dependent?

Generally speaking, you cannot claim a married person as a dependent if that person files a joint return with his or her spouse. You cannot claim non-U.S. citizens, any U.S. resident alien, a U.S. national who resided in Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

What if I have more questions about dependents?

See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

Can I claim a charitable deductions for any charity I choose?

No. If you plan to claim a charitable deduction, make certain the charity is a tax-qualified organization under IRS rules. Use GuideStar to research a non-profit organization of charity’s tax-exempt status.

Can I deduct a donation if I received something in return?

No. These are called “charitable purchases” and are only deductible for the amount exceeding the worth of the item purchased. For example, if you attend a fancy $500 a plate dinner for children’s hospital, the deductible amount is equal to $500 minus the fair market value of the dinner.

Can I deduct what I spend at a charitable auction?

The same rules apply. If you bid $700 for  a week’s stay at a one bedroom beach condo in Florida. You probably didn’t exceed the fair market value of that stay and your bid wouldn’t be considered a legitimate tax deduction. However, if you bid $3,000 and the going rate for that condo is $700, you would be eligible to deduct $2,300.

Do I have to have a receipt for my charitable contributions?

Yes. Whatever you do, make sure you get your receipt for any and all of your charitable cash contributions – if you want to deduct them!

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What records do I need to provide as record of my charitable contribution?

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:
   • A canceled check,
   • A bank or credit union statement, or
   • A credit card statement.
2. A receipt (or a letter or some other formal written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.

Where can I get more information on charitable giving?

Refer to IRS Publication 526, Charitable Contributions, for additional information (and a lot of it) on giving to charity.

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Employers are required to send W-2 wage statements to their employees no later than January 31 of each year. Many employers send W-2s earlier (some by a couple of weeks) in order to allow employees to complete their tax return as early as possible. That W-2 is critical to completing your tax return … without it you’re sunk. But what if you don’t receive yours on time? What if you’re hearing your co-workers talk about completing their tax return and you’re still waiting on that uniquely shaped envelope that contains your W-2?

What to do if you are missing your W-2

If the January 31st deadline passes and you still haven’t received your W-2 from your employer, take these steps:

1. Ask your employer or employers when the W-2 was mailed. If it was mailed, it may have been returned due to an incorrect or incomplete address. After contacting your employer, allow a week to ten days for the W-2 to be resent and go through the mail system.

2. Ask your employer if the W-2 can be reprinted while you wait. One year mine didn’t arrive on time and our payroll clerk simply printed one for me on the spot. Another alternative is to ask if it can be emailed to you as a PDF.

TurboTax vs H&R Block: which one is better?

3. Call the IRS for help. If your employer claims to have sent your W-2 and cannot reprint it or email it and you still haven’t received your W-2 by February 14, call the IRS at 800-829-1040. When you call, you’ll need to provide:

• Personally identifiable information such as your SSN
• An estimate of the wages you earned
• The amount of federal income tax withheld during the year
• The dates you worked for that employer during the tax year

This information should be based on the year-to-date numbers from your final pay stub for the year or your leave-and-earnings statement if you are no longer employed with this employer.

4. REMEMBER! You still must file your tax return or request an extension to file by the deadline, even if you do not receive your W-2. If you have not received your W-2 by the tax due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to your return, estimating income and withholding taxes as accurately as possible. Understand that any refund you’re owed may be delayed while the information you provided is verified.

5. You may have to amend your return. If you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Have you received your W-2?

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Not everyone uses TurboTax or H&R Block Online to complete their tax return (surprise!). Some people don’t like dealing with large companies, some want to support “the little guys”, and some just like the feel of the other tax software packages. Regardless, there is a significant number of people who prefer to use a smaller company’s tax preparation software. Does this describe you? If it does, give one of these companies a look:

CompleteTax

Just like TurboTax and H&R Block, Complete Tax offers:

• Maximum refund guarantee
• 100% accuracy guarantee
• Audit support
• Phone support
• Security and privacy of your personal information
• And a “price lock” guarantee that says the price of your tax preparation product, once you are registered, is locked-in — your price will not increase

Cost: up to $60 if you file your state return with them

Click HERE to get started with Complete Tax

OnePriceTaxes.com

OnePriceTaxes offers you the opportunity to file your federal and state taxes online for only $14.95! Whether you need to file a simple 1040EZ, own a home, own investment or rental property, are a sole proprietor with a business, plan to itemize or now, you can file both federal and state for one low price. OnePriceTaxes.com offers AuditGuard® to provide a type of insurance against audits for an additional $19.95 (36 months coverage). Since both TurboTax and H&R Block provide this as part of their standard package, the price gap closes substantially when you consider audit protection as a factor.

Cost: $14.95

Click HERE to get started with OnePriceTaxes.com

1040Return.com

This company’s best feature is that if you have more than one state return to complete, it’s still the same price ($24.95). They also offer:

1. Ease of use - You only need to key in the data once, even for multiple state returns
2. Reliability – Their tax return processing engine has been trusted for over 30 years
3. Accuracy – Your return is checked prior to transmission to eliminate filing errors
4. Safety – Your tax return information is protected using SSL encryption
5. Free Online Tech Support
6. Free Ammended Return – If you have to make a change to either your Federal and/or State Return, 1040Return.com will prepare the return for you free
7. Free tax alert newsletters – So you can stay informed in the constant changing world of tax law

Cost: up to $55.90 if you file your state return with them

Click HERE to get started with 1040Return.com

Two more options for completing your taxes …

• Use a tax professional that you found on WiserAdvisor. Their advanced Matching Service is designed to objectively help individuals like you quickly and easily find the ideal tax advisor (or financial advisor) to meet your unique needs. It takes just 5 minutes, there’s no obligation, and you select the specific advisors you want to be contacted by.

• Plunge into the deep end of the pool while wearing concrete boots and complete your tax return by hand using a stack of booklets provided from the Internal Revenue Service.

Guess which one I would NOT recommend!

Technorati Tags: taxes, IRS

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Though most people who prepare tax returns are professionals and render correct, honest, thoughtful and excellent service to their tax return clients, some DO occasionally make a basic math error of miss a deduction. Those aren’t the people you need to beware of. No, I’m talking about the fly-by-night types that engage in fraud and other illegal activities. These scammers set up shop one day and are gone a few weeks later. When the unsuspecting tax filer discovers their mistakes and fraud, these guys are no where to be found.

Dishonest tax return preparers can cause big trouble for taxpayers who fall victim to their ploys because regardless who prepared the tax return, the taxpayer is still responsible.

How do these tax scammers make their money?

1. Skimming a portion of their clients’ refunds by charging the client a percentage of their tax refund as a fee. The higher the refund, the higher the fee.
2. Charging inflated fees for less than stellar tax return preparation.
3. Flat out false promises of refunds or tax deductions.
4. Identity theft. These scammers have everything they need to steal and/or sell your identity (adding insult to injury).

Choose your tax professional carefully

Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against dozens of others. To increase taxpayer confidence in the tax system and improve compliance with the tax law, the IRS has implemented a number of requirements for paid tax preparers, including registration with the IRS, as well as competency tests and ongoing continuing professional education. The new regulations require paid tax preparers (including attorneys, CPAs, and enrolled agents) to apply for a Preparer Tax Identification Number (PTIN) before preparing any federal tax returns.

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While higher standards for the tax preparer community will result in greater compliance with tax laws, increase confidence in the tax system and ultimately lead to a better experience for taxpayers, it all comes at a cost and those costs are bound to be passed along to the tax filer.

Filing false or misleading tax forms

IRS personnel report cases where scam artists file false or misleading returns to claim refunds to which they themselves are not entitled. In one variation of this scheme, a taxpayer seeks a refund by fabricating an information return and falsely claiming the corresponding amount as withholding. Phony information returns, such as a Form 1099 Original Issue Discount (OID), which claims false withholding credits, are usually used to legitimize erroneous refund claims.

Another version of the scheme is based on the bogus theory that the federal government maintains secret accounts for its citizens and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS. The IRS continues to see cases where people file false or fraudulent tax returns to try to obtain improper tax refunds.

The IRS takes refund fraud seriously, has programs to aggressively combat it and stops the vast majority of incorrect refunds. Because scammers often use information from family or friends in filing false or fraudulent returns, beware of requests for such data. Don’t fall prey to people who encourage you to claim deductions or credits you are not entitled to or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even worse, face criminal prosecution.

How to avoid being scammed

First, make sure you thoroughly check out anyone you’re considering as a tax preparer. Ask them for their PTIN and ask about their testing and professional education.

Second, unless you have a severely complicated return, do your taxes yourself. TurboTax is my tax preparation software of choice and H&R Block is another one that’s very good as well (I used them for 14 years before switching to TurboTax). TurboTax is exceptionally easy and with the proper documentation, I believe my 12 year old son could do my taxes. The software is THAT EASY!

So give it a shot and try TurboTax. You don’t even have to pay anything unless you actually file!

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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.

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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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