Every new year brings fresh beginnings, determined resolutions and annual responsibilities. While there are plenty of things to be excited about with the new year, this time also signals the start of tax season. For some, they have their eyes on the prize: a big refund. Others are stressed and confused about how to navigate the tricky tasks of taxes. While the tough part of tax season is hopefully over, it’s still important to keep track of your finances. Here are some of the things you must know to achieve better success with your taxes and overall finances.
How to manage Taxes on time?
What are taxes?
Let’s start with the basics of taxes. These are mandatory monetary charges required by law. Governments throughout the world ask citizens and residents to pay taxes in order to fund and support public resources. Your taxes go toward everything from public schools to roads and national parks, emergency responders and much more.
Every state has slightly different tax laws. Your required taxes may be different depending on where you live. For example, seven U.S. states do not have income tax, including Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In all other states, residents will have part of their paycheck taken out to cover their income taxes.
Sales tax is another way for governments to support themselves and the public resources they provide for residents. You probably pay sales tax on certain purchases, such as groceries or clothing. However, Alaska, Delaware, Montana, New Hampshire and Oregon do not have a state sales tax. These states may make up for the lack of sales tax with higher property, income or estate taxes.
Every year, individuals and businesses in states with income tax are required by law to file tax returns to figure out whether they owe any taxes or will receive a tax refund. The Internal Revenue Service (IRS) is a government agency of the U.S. Department of the Treasury. The IRS is responsible for collecting taxes, helping taxpayers through the process, and pursuing cases of fraud.
Taxes are notorious for confusing people of all ages. Whether this will be your first time filing taxes or you’re a seasoned veteran, there are so many details to remember.
First things first, taxes take time, and in order to better manage your finances, you should actually prepare for tax season all year long. By keeping proper records and staying organized, you can save your time a lot of time and stress when the time to submit your tax returns.
January: Expect Employer W2’s to arrive
February-April: File taxes with the help of professional accountants or online services
April 15: Tax Day- taxes due!
At the start of the year, employers are required to provide employees with W2’s. These are federal tax forms confirming how much an employee received in wages in the past year. This past winter, millions of Americans received these forms in the mail or via email. This paperwork is essential for filing tax returns, as you will need these amounts to determine if you underpaid or overpaid your taxes.
Once you receive W2’s from all employers and sources of income, you can start working on your tax returns. There are many options for this, from working on your tax returns yourself to enlisting the help of professional tax preparers and accountants or using online services. For those expecting a refund, the earlier you file your tax returns, the sooner you may receive that big bonus in the mail or your bank account. For those who may owe taxes, waiting until closer to deadline may give them some extra time.
Every year, Tax Day comes around and many people scramble to get their tax returns in on time. According to the Library of Congress, since 1955 Tax Day has typically fallen on April 15 for people in the U.S. When that day falls on a Friday, tax returns are due the next Monday. When April 15 is on a Saturday or Sunday, tax returns must be filed by the following Tuesday.
Challenges in filing your Tax Returns
In a perfect world, filing your tax returns would be as simple as a walk in the park. Unfortunately for the estimated 146 million Americans who file their taxes every year, taxes can be a stressful and overwhelming time.
“Two reasons tax filing is so complicated in the U.S. are (1) we do a great deal of social policy through “tax expenditures” and (2) we tax households rather than individuals,” said Andrea Campbell, an MIT scholar of the U.S. tax system, said in an interview with the Washington Post.
“A “tax expenditure” is basically a form of government spending, but one delivered through the tax code. We use the income tax code to encourage and discourage a lot of different social and economic behaviors.
So, for instance, let’s say that the government wants to encourage home ownership or employment or child care. They could set up a program to do those things — or they can just give homeowners, workers and parents a special break in the tax code.”
Despite this complicated tax system with so many details, millions of Americans manage to get their taxes in on time every year. But filing by deadline is just half the battle. It is just as important to file your taxes truthfully and accurately, or you run the risk of undergoing IRS tax audits.
According to the IRS, a tax audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.” While tax evasion is a crime, so is tax fraud, or providing false information on tax statements.
Luckily for U.S. taxpayers, the amount of IRS audits has dropped to its lowest point since 2002, according to wbur.org. It’s understandable that taxes can be confusing, and mistakes do happen, but it is important to be as accurate as possible when it comes to preparing your taxes. That way, you have your bases covered if the IRS decides to take a closer look at your taxes.
If you are notified of an IRS tax audit, do not panic. According to the IRS, “Selection for an audit does not always suggest there’s a problem.” Several different methods are used to identify audits, including random selection, computer screening and related examinations. If your returns are associated with other taxpayers, such as investors or business partners, who were selected for audit, yours may be too.
During an IRS tax audit, an experienced, professional auditor reviews the submitted return. They have the option to accept it or flag something questionable. They will mark the items in questions before passing the return on to an examining group.
The IRS says receiving a refund is not an automatic flag for an audit. If your return is selected for audit, the IRS will notify you by mail. Beware of any telephone calls regarding an audit; these may be a scam as the IRS will not initiate an audit over the phone.
All audits are conducted by mail and/or in-person interviews. During the review of records, audit interviews may take place at an IRS office, the accountant’s office, or at the taxpayer’s home or workplace. All relevant information and instructions will be included in the mail.
For audits conducted entirely through mail, the IRS will ask for additional information about certain items on the tax return. This may include records, tax books or documents for income, itemized deductions and other expenses. The IRS provides Audit Techniques Guides to give taxpayers a better idea of the audit process and what to expect.
The IRS has also published a list of records they may require for an audit. Popular tax software companies, such as TurboTax or H&R Block, produce electronic records that the IRS may accept in place of or in addition to other types of documents.
Your auditor could answer any questions about acceptable materials. Keep in mind that just because taxes are stressful doesn’t mean you should be shredding your documents once your return is accepted. The IRS reminds taxpayers that “The law requires you to keep all records you used to prepare your tax return – for at least three years from the date the tax return was filed.”
There are three possible outcomes of an audit. First, an audit can result in no change, where you have proven all of the items in question, resulting in no changes. You can also agree to proposed changes by the IRS or disagree with proposed changes despite acknowledging you understand the changes.
This process may take anywhere from several weeks to several months, depending on the outcome of the initial audit. If you do not agree with the proposed changes, you will need to take part in a meeting with a manager from the IRS, take part in mediation or hire a lawyer to file an appeal, provided it is within the statute of limitations.
Nobody wants to worry about IRS tax audits or struggling to find the necessary information to submit your tax returns.
By taking a little bit of time now to organize your finances and get all your ducks in a row, you will be setting yourself up for future success by ensuring you have everything you need for your taxes.
Tax season shouldn’t have to be such a big burden, and it won’t be if you keep track of your documents and focus on your finances year-round.