In tough financial times, getting taxes right the first time is more important than ever and as some of Obama's Cabinet appointments have proved, slighting the tax man can have devastating consequences.
Luckily, Mellody Hobson, "Good Morning America's" financial contributor and president of Ariel Investments, has some tips to help you avoid audits, collect on your return and survive this tax season. Check out her advice below.
Be Careful! There Are More Tax Collectors Than Ever
The federal government has been increasing audits for the last decade.
The number of people audited more than doubled in that time. And tax experts say there is an even bigger push this year -- at the IRS and at the state level -- to help reduce big deficits by collecting more money from taxpayers. You should be paying close attention to your returns every year, but this year, you really want to make sure you've dotted all your i's and crossed all your t's.
Red Flags to Look For
The IRS uses a very complicated formula to determine who will get audited.
The name itself -- "the discriminate information function system" -- is enough to confuse most people. But that said, there are two things that will raise red flags for most auditors.
Having unusually high expenses, something like a $50,000 medical bill, can really put you under the microscope. You need to explain why you have the high expense. In this case, you could include the medical bills.
The other big red flag is deductions for charitable donations. The average charitable donation is around 2 percent of a person's income, so if the IRS sees a deduction that's much higher -- something around 10 percent -- that could raise suspicion. Again, you'll need to document why it's so big and you'll need to include receipts.
How to Avoid an Audit
The most important thing is to be honest -- don't cheat.
Next, don't be sloppy. Make sure your return is organized and free of errors.
E-filing is a great way to minimize errors. The computer software automatically checks your math and makes sure that you sign your returns before submitting them.
You'd be shocked by how many people forget to do it. A sloppy return doesn't mean an instant audit, but it may raise the IRS's interest in you.
And if you're itemizing deductions, be sure to keep backup documentation for everything you deduct and remember that any deductions related to meals and entertainment of more than $75 requires a receipt.
If You've Lost Your Job or Just Can't Pay
If you don't have the money to pay, you can arrange a payment plan with the IRS.
You may qualify if your tax bill is less than $25,000 and can be paid off within five years. So, most people will be able to take advantage of that. These payment plans are not free of charge, but the interest rates are typically much more favorable than taking out a loan. The IRS's interest rate is currently 5 percent.
Additionally, if you are approved for a payment plan, you will also be charged an additional one-time fee of $105.
Extensions Only Delay Filing, Not Payment
An extension allows you to delay filing your official tax return for six months. But it does not delay the time for you to make a payment, if you owe money.
You must still pay all the taxes you owe on April 15, or you will incur interest charges. Filing an extension should not be done in place of not filing a return at all. It's not a way to defer payment. So, if you know you can't pay your taxes, you'll need to set up a payment plan.
Try Not to Use a Credit Card to Pay Taxes
The IRS says about that 2.5 million Americans have already used their credit or debit cards to pay their tax bill this year. That's a 12 percent increase from last year. But while this may seem like a good idea, you will likely be charged a convenience fee of a 2.49 percent on your entire tax bill by one of the approved service providers handling your payment.
On average, Americans owe about $2,200 to the IRS, so with the convenience charge your total amount owed would be $2,255.
If you only paid the monthly minimum on this balance, and you had an average interest rate of 12 percent with a minimum payment requirement of 2.5 percent, it would take you almost 14 years to pay off this debt and you would end up paying an additional $1,350 in interest.