Tax Prep 101 - Lesson #1

In the course of the next few weeks, I'm going to be guiding you through the preparation of a "basic" tax return. And along the way, I'm going to throw in some vital information that will help you to understand the process.

These guidelines will be based on simple or basic returns and will both educate and enlighten you on some of the things that the IRS will be looking for and could help you to avoid the possibility of an audit.

First and foremost, always have your return prepared each year. I know that some of those 1099's, W-2 G's (gambling) and 1099-B (stock sales), not to mention the dreaded 1099-R (withdrawal from pension plans) can scare you to death at tax time. But generally, I have found that the fear is worse than the outcome of the return. Have your return prepared to see what that outcome is first, then panic if you must.

Failure to file a return is one of the worse scenarios that you can find yourself facing. No, the IRS may not get you in the first or second year, but you can bet on the fact that within a couple of years they will be sending out those SFR's (Substitute For Returns) which they have graciously filed for you.

If a taxpayer has not filed a return and the IRS feels it can collect from the money earned, an IRS Revenue Officer may file a SFR. When a SFR is filed, the agent lists all of the income reported to the IRS for that year, but only gives the taxpayer one exemption and only the standard deduction (i.e. nothing is itemized). Even if for the past 10 years the taxpayer has itemized, the IRS prepares the return in their favor. If the taxpayer has children the IRS tries to file the return based on the information from the previous years (i.e. married filing joint with 2 children), but IRS will only file this way if they have previous returns showing this information.

Waiting years to file a return will land you with late filing penalties and interest that have accumulated from the date the return was due. At that point, you will be find that you have dug a hole that only a tax professional can help correct.

Ironically, most of the delinquent returns that I prepare resulting from fear or neglect, result in refunds. Say for instance that you have not filed since 2000 and you need to file six years worth of returns. In 2000-2003 you would have received a refund and the remaining years you owe. Under IRS regulations, you can only receive your refund for the past three years (2004-2006). Hence, you have lost four years worth of refunds to the IRS. In most cases, they will also not let you apply what you would have received to what you now owe.

Trust me when I say that it is not worth the procrastination or the fear. Be proactive and no reactive, get the facts first and then decide what you want to do. You might find that things aren't quite as bad as you thought they would be.

S. Raines, Sr. Financial Advisor/Tax Preparer