- I've just received a notice that I'm about to be audited. What can I expect?
- What's the difference or benefit of working with a financial planner who may offer financial advice for free, or hiring an advisor and spending more money?
- Is it more beneficial for my spouse and I to file a joint return or separate returns?
- What is the difference between a regular IRA and a ROTH IRA? Which one is better for me?
- How do I know if taking out a home equity loan is the right choice for me?
I’ve just received a notice that I’m about to be audited. What can I expect?
Your first step is – don’t panic! An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct, and they can be initiated for a variety of different reasons, such as:
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula.
- Document matching – when payor records, such as Forms W-2 or Form 1099, don’t match the information reported.
- Related examinations – 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.
You can expect a close examination of your accounting and financial documents to determine their accuracy, consistency and conformity to legal accounting principles. Generally, the IRS can include returns filed within the last three years in an audit, but additional years can be added if a substantial error is identified. If that is the case, the IRS will not go back more than the last six years. If you receive a notice of audit, you should immediately contact the person or agency who prepared the tax return in question, and send them a copy of the notice as soon as possible. If your return was self-prepared, and you are worried about being able to go through the process alone, contact a CPA to discuss having them assist you in dealing with the IRS.
You can read more about the IRS audit process here.
For help with choosing the right CPA, please check out our page with information on How to Select the Right CPA.
What’s the difference or benefit of working with a financial planner who may offer financial advice for free, or hiring an advisor and spending more money?
As with anything, there are both pros and cons to receiving free help versus paid expertise. Though it might seem beneficial to take advantage of something offered for free, financial planners who work for a particular investment firm may offer advice at no cost, but they are able to do this because they receive commissions based on the financial products they sell to you. As a result, their advice may not be completely objective and impartial, though you may decide, based on your personal situation, that that may be all that you need at that moment. With a dedicated financial planner though, you’ll be able to work with them towards your own personal financial goals, making sure that your priorities are at the top of the list in setting a plan that works for you.
Is it more beneficial for my spouse and I to file a joint return or separate returns?
Ordinarily, it is more beneficial to file a joint tax return – either your refund is higher or you will owe less taxes. There are also several tax deductions you can claim when married, but not when filing separately. However, there are instances where it is more advantageous to filing separately. One reason would be to protect yourself from inaccurate tax information reported by your spouse, or in cases where your spouse refuses to file a joint return (or refuses to file, period) and you don’t want to get in trouble.
Also, when you file separately, your refund cannot be seized to pay off your spouse’s debts. However, filing jointly as an innocent or injured spouse can head off refund seizures as well.
If you’re unsure which route is the best for you, it might be worth it to speak with a CPA about both options and ask for a comparison of the two.
What is the difference between a regular IRA and a ROTH IRA? Which one is better for me?
Both a regular IRA and a ROTH IRA offer tax advantages. With a traditional IRA, a certain portion of the money you contribute (up to $2000 for most people) is tax-deductible during the year that you contribute the money, but once you retire and withdraw the funds, you will be taxed on the accumulated amount. In the case of a ROTH IRA, you do not receive a tax deduction during the year you contribute to the fund, but your money accumulates tax-free, and you need not pay taxes on the accumulated funds when you retire and withdraw them. Before deciding, you should review your current tax rate, as well as your projected retirement date and your probably tax rate at the time of your retirement. Your accountant or financial advisor can guide you on the best option based on your individual needs and situation.
How do I know if taking out a home equity loan is the right choice for me?
The decision on whether to take out a home equity line of credit or a home equity loan depends on how the money will be used. With a home equity loan, homeowners get one lump sum that they have to pay back with interest. Matt Potere, home equity product executive, senior vice president at Bank of America, says a home equity loan is best to fund a specific project like a kitchen remodeling or a deck addition. Home equity loans can be a great tool for debt consolidation, especially if interest rates are fairly low. These loans also offer an attractive tax deduction feature. However, there is a cost associated with refinancing, and you’ll need to determine whether the savings and tax benefit you’ll realize will outweigh the cost of refinancing.
I’m thinking about starting a business and I’m not sure whether to form a Corporation, a Limited Liability Corporation (LLC) or a Sole Proprietorship. Which is best for me?
When setting up a new business, it can get very tricky navigating the different types of business entities and which would work best for you. On a broad scale, the following advantages and disadvantages apply:
Corporation offers limited liability for the shareholders, as well as favorable tax treatment for certain benefit plans such as health, disability, and group term life insurance. It is often easier for a Corporation to raise financing for equity purchases or debt structures, and the use of corporate stock can be an incentive to key employees. Corporations also bring with them weighty tax consideration, higher attorney’s fees due to the number of documents that must be filed on behalf of the Corporation, and the need to observe formalities such as annual meetings, the recording of meeting minutes and other corporate records, and the filing of annual reports with the NJ Secretary of State.
Limited Liability Corporation (LLC) also offers its members limited liability for the debts and obligations of the company, but the tax considerations and filing requirements are much less onerous than those of a Corporation. Not all states recognize LLCs, and as a result, if your LLC does business in a state that does not recognize LLCs, then your personal assets will be exposed to creditors’ claims in that state.
Sole Proprietorship is the simplest business structure, in which the owner has absolute authority over all business decisions, as well as freedom from legal formalities and high attorney’s fees. Since the owner of the business is not an employee of the business, unemployment taxes on income from the business do not have to be paid. In addition, money can be moved out of the business account and assets withdrawn from the business, with very few legal imitations, and without paying taxes. On the other hand, a Sole Proprietorship offers no insulation from personal liability for obligations of the business. Additionally, a Sole Proprietorship does not qualify for tax breaks like corporations for favorable group insurance plans.