Having children can help you to save on your taxes. The IRS has just revealed the ten tax benefits you can have when you have kids.

1. The most obvious tax benefit in having children is being able to claim dependency deductions. Most of the time, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

2. You can claim Child Tax credit for each of your children so long as they are below 17 years of age. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.

3. If you hire someone to care for your children under 13 years of age while you go to work (or look for a job), you may be able to claim the Child and Dependent Care Credit. IRS Publication 503, Child and Dependent Care Expenses covers this provision.

4. If you incur expenses adopting a child, you may be eligible to claim for the Adoption Credit. In order to claim the Adoption Credit, you must file a paper tax return with required adoption-related documents. For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

5. You can deduct insurance premiums that cover your child under 27 years of age if you are self-employed and pay for your own health insurance, even if your child is no longer your dependent.

6. Do you have children pursuing higher education? You may be able to claim Higher Education credits such as the American Opportunity credit and the Lifetime Learning credit that can offset your child’s higher education fees. Some credits (like the two mentioned above) are dollar-for-dollar credits, meaning they reduce your expenses by the exact amount.

7. If you have an outstanding student loan, you may be able to deduct the interest paid on a student loan that qualifies for deduction. This is possible even if you do not itemize your deductions. See IRS Publication 970, Tax Benefits for Education for more information on the Higher Education credits.

8. If you are a wage-earner, self-employed or do farming, you can claim the Earned Income Tax Credit (EITC). This credit reduces your tax liability and may even give you a refund and is applicable whether or not you have children. For more information, check out IRS Publication 596, Earned Income Credit.

An IRS audit is the thing most taxpayers are afraid of. But most of this fear comes from not knowing what an audit is all about, what it entails and most of all, what to do when you receive and audit notice. So if you know a few basic things about the whole matter, it takes a lot of fear out of it. Receiving an audit notice does not mean that you have committed an offence. In fact, audits can result in acceptance of the tax return without change or even a refund. If that be the case, how does the IRS choose who to audit in the first place?
There are several factors that govern who the IRS chooses to audit. Firstly, some tax returns are chosen for audit through the screening of a computer. An IRS computer compares data from a return to average numbers from other people’s tax returns in similar situations looking for variances. The data that is reviewed by the computer are things like charitable donations, interest income and variations from averages in your income bracket or zip code. If a major variance is detected, that tax return is chosen for audit.

Secondly, tax returns are chosen for audit based on comparisons with other documents like your W2s. The computer sees if your tax return matches up with your W2 and if there is a mismatch, that return is called for audit.

Thirdly, there is the category called “related examinations”. This is where returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit. And finally, some returns are selected for audit purely at random.

Most taxpayers would not face an audit their entire lives. According to IRS statistics, those earning below $200,000 per year had only a 1% chance of being chosen for audit whereas the rate of audit for those earning above $1 million a year was about 12.5%. All in all in 2010, the IRS audited nearly 1.6 million individual returns, slightly more than 1% of the total filed. Most of the audits were conducted via letters, and others through field examinations by an IRS agent. If your tax return is chosen for audit, you will be notified via a phone call or snail mail, never via email.

Some of the more common people called for audits are those that make charitable contributions, those earning cash income (like waitresses or bellboys) and those claiming deductions from a home office.

The best defense in an audit is accurate documentation. It is important for you to think through those items reported by third parties and make sure you have the documentation that matches up with them. And you should always have copies of your expenses and official receipts. If these are in order, you should have no fear of an audit.

What if You Face the IRS in Court

If you have to face the IRS in court, would you know how to defend your case? Preparation is the key, but preparation depends on what your case would be about. Another important factor is whether you have a lawyer represent you or you choose to represent yourself. Taxpayers who choose a lawyer to represent them in cases of dispute with the IRS are successful 58% of the time whereas those who represent themselves are successful only 34% of the time. There are a slew of cases that taxpayers and the IRS most frequently contend over in court. Here are some of them and how you can deal with them.

1. Deductible expenses
Among the most frequent sources of contention between the IRS and individual taxpayers is expenses allowed for deduction. This means you deduct certain business expenses that the IRS deems not a business. You will likely receive an audit notice in such a case. This has been most common among animal related businesses as the IRS often sees the animals as pets and the business as a hobby rather than a genuine business. This is especially so if you report the business as a loss making one.

Therefore if you run a loss-making business and you wish to claim deductions on business expenses, you would do well to get the professional opinion of a tax attorney on your case.

2. Non-taxable income
Another frequent source of contention in court between the IRS and taxpayers is what amounts to non-taxable income. Fixed and regular wages, fees, salaries etc are very straightforward. But the contention arises when it comes to things like damages awarded by a court or discharges of debts. Generally, court-ordered damages due to physical injury or sickness are not taxable but other damage payments like damages for emotional distress are. So the best thing to do is to clearly state what the damages are for and have a tax attorney review the final settlement to advice you on how to successfully classify your damages as non-taxable income.

Likewise, when it comes to discharge of debts such as a housing loan debt, it is better to seek proper legal counsel from a tax attorney to find out if your discharge can be tax exempt.

3. Innocent spouse issues
The question of whether an innocent spouse was ignorant of the offending spouse’s tax transgressions is another common contentious issue. A spouse is an innocent spouse if there was genuine ignorance. Again, the best route to take in determining this is to hire a tax attorney to review your case.

4. Contributions to charities
This is quite a new type of contention that has been getting more prevalent lately. To determine if the charity you contributed to is a qualified tax-exempt charity is easy but issues arise when determining the value of your contribution if it is in kind. The key here is to obtain official and legitimate valuation of your contribution in kind to any tax-exempt charity.

If you are facing issues with the IRS over some disputed taxes, we are here to help. Call us at (813) 229 7100 for a free consultation.

Tax submission deadline this year is April 17 (courtesy of Emancipation Day holiday in DC). You should be receiving the usual W2s and 1099s in the mail pretty soon. The IRS has issued some guidelines for you to follow to make it easier on yourself when tax season kicks off in full swing.

Firstly, start getting your records up to speed. Gather all receipts, statements and income documents to validate your income and expenses for last year. Here’s what Clay Sanford, an IRS representative in Dallas said: “The first thing you'll want to do is to gather your records and round up any documents you'll need when filing your taxes. Get into the habit of keeping good records every year — saving receipts, canceled checks and other documents that support income or deductions you're claiming on your return.”

If you do not receive your W2 or 1099 forms by end of this month, you should contact your employer. If you have changed address, inform your employer accordingly.

The IRS is actively encouraging taxpayers to file their tax returns electronically. More than 70% of taxpayers used the IRS e-filing service last year. Filing your tax returns electronically has many advantages, not least of which are eliminating the possibility of tax returns lost in the mail and speeding up tax refunds. Sanford says you should use Free File with tax software or online forms. Log on to www.irs.gov/freefile and you will find Free File Fillable forms, the digital version of the IRS paper forms. If your income is not more than $57,000 per year, you can access free tax software.

Last year, 106 million taxpayers filed their taxes electronically. When preparing your tax returns, you can do it yourself or engage the services of a tax preparer company or certified enrolled agents. In addition, the IRS annually sets up volunteer sites all over the country to help with tax filing for those like the elderly and impaired. Many tax preparers are now required to use e-file. If you owe taxes, you have payment options to file immediately and pay by the tax deadline.

If you e-file and opt for direct deposit, you will receive your tax refund within 14 days if there are no problems. Some people have even received their tax refunds within 10 days. This sure beats waiting for a check in the mail, which is another strong reason to e-file.

Lastly, be sure you double check your Social Security number and all the math calculations in your filing (especially if you make paper filings). If your Social Security details are not in synch with the information the IRS has on file, it will delay your submission process and your refund also. And if you make paper filings, you should ensure that your address is correct and look up where to file your returns (visit www.irs.gov). Make sure the financial institution routing and account numbers in your tax return are accurate. You wouldn’t want any unnecessary delays in your tax process.

In a recent report it has been revealed that IRS corporate auditors find an average of $9,354 in unpaid taxes owed by companies every hour they spent examining their tax returns. These are generally owed by the 14,000 or so of the largest companies in the United States in the 2009 fiscal year who pay about 86% of corporate income taxes.

But here’s the kicker – these corporate auditors may be axed soon, not because they have not been performing but simply because Congress has reduced the IRS annual revenue by about 5% this year. Without these corporate auditors, how can the unpaid taxes be recovered? If the cost of keeping these corporate auditors on the IRS payroll exceeds the amount of taxes they could recoup, then the action by Congress can be considered sensible. But an IRS auditor makes at most $71 an hour. Based on a 2,080-hour work year, it would mean a loss of about $19 million in annual revenue for every senior corporate auditor axed by the IRS. So does it make sense to reduce the IRS budget?

In fact, the National Taxpayer Advocate Nina Olsen herself recommended to Congress that they should “ensure that the IRS continues to be effective, either by reducing the IRS’ workload or by providing adequate funding to enable it to accomplish its assigned mission.”

The likely major factor contributing to the reduction in IRS financial allocation could be the increasing influence of unions and corporate lobbyists and the decision by the Supreme Court in Citizens United that allows corporations (and unions) to spend all they can afford on influencing elections.

The reduction of revenue for the IRS will likely jeopardize ordinary taxpayers because it would mean slower refund rates and poorer standards of service (think more unanswered calls to the IRS, longer waits while you are put on hold and more difficulty getting issues resolved). Generally, these people do not cheat on their taxes because their incomes can be easily checked by the IRS through reports by employers, mortgage banks and others. Yet these are the very ones who will suffer because of the IRS budget cut.

On the other hand, the ones who would likely benefit are the tax evaders, more of whom may slip through the net because of a shortage of enforcement officers and auditors in the IRS. Another group of taxpayers likely to benefit would be sole business owners out to game the system. Statistics in the IRS tax gap report released on January 6 have shown that only 1% of wage earners escape tax but a staggering 56% of businesses where little or no verification of their incomes escape tax.

Twenty years or so ago, there were about 118,000 IRS employees. Now the IRS has about 95,000 workers and soon it may be reduced to some 90,000. The likelihood of a big company being audited has fallen by 50 percentage points from 72% twenty years ago to 22% in 2010.