Whether you prepare your return yourself or retain a professional preparer, you must first collect and organize your tax records. You cannot prepare your return unless you get your personal tax data in order. Good records will help you figure your income and deductions and will serve as a written record to present to the IRS in the event that you are audited.

Review income statements from banks, employers, brokers, and governmental agencies on their respective Forms 1099. Check for miscalculations, additions, and omissions.

Survey Chapters 12–21 of this book for deductions you can claim directly from gross income and itemized deductions you can claim on Schedule A of Form 1040.

Reviewing your tax return from prior years will help refresh your memory as to how you handled income and expenses in prior years. This review will also remind you of deductions, carryover losses, and other items you might otherwise have overlooked that you might be eligible for. If you self-prepare your return using the same software or an online solution as in the prior year, it will automatically display this information for your (as long as you import last year’s return information). If your prior year returns were prepared by a professional, he or she can probably provide you with a copy of your returns if you do not have them. Otherwise, you may obtain copies of prior year tax returns by filing Form 4506 with the IRS and paying a fee.

In this chapter you will find a checklist of steps to take when preparing and checking your return. If you need an extension to file, see 46.3.

46.1 Keeping Tax Records

To maximize tax-savings opportunities, you must keep good records throughout the year. Good recordkeeping makes it easier to prepare your return, reduces errors, and provides a defense to any challenge from the IRS.

• Make a habit of jotting down deductible items as they come along.
• Keep a calender or diary of expenses to record deductible items.
• Keep a file of bills and receipts. This will remind you of deductible items and provide you with supporting evidence to present to the IRS if audited.
• Use your credit card receipts, online account statements, and checkbook stubs as a record. If you own a business, you must keep a complete set of account books for it.

IRA records. If you have made nondeductible contributions to a traditional IRA, keep a record of both your nondeductible and deductible contributions. This will help you when you withdraw IRA money to figure the tax-free and taxed parts of the withdrawal (8.9). Also keep records of contributions and conversions to Roth IRAs and myRAs (8.20–8.22, and 8.26). For these purposes, you should keep copies of Form 8606 and Form 5498 (8.8).

Reinvested mutual fund or ETF distributions. Keep a record of mutual fund or ETF distributions that you have reinvested in additional fund shares. The reinvested amounts are part of your cost basis in the fund. When you redeem your shares, you need to know your basis to compute gain or loss (32.10). Your fund probably keeps track of basis for you, so you can get basis information from the fund when planning a sale.

Passive losses. If you have losses that are suspended and carried forward to future years under the passive loss restrictions (10.13), keep the worksheets to Form 8582 as a record of the carry-forward losses. Also, if you deducted passive losses from rental real estate as an active participant or a real estate professional, retain records, such as a diary, showing your participation in rental activities.

Home mortgage interest. Keep your bank statements and canceled checks. If a loan secured by a first or second home is used to make substantial home improvements, keep records of the improvement costs to support your home interest deduction (15.5).

How long should you keep your records? Your records should be kept for a minimum of three years after the year to which they are applicable, since the IRS generally has three years from the date your return is filed to audit your return. Some authorities advise keeping them for six years, since in some cases where income has not been reported, the IRS may go back as far as six years to question a tax return. In cases of suspected tax fraud, there is no time limitation at all.

Keep records of transactions relating to the basis of property for as long as they are important in figuring the basis of the original or replacement property. For example, records of the purchase of rental property or improvements thereto must be held as long as you own the property.

As mentioned above, if you have made any nondeductible IRA contributions, records of IRA contributions and distributions must be kept until all funds have been withdrawn. Similarly, you should save confirmations from stock dividend reinvestment plans and mutual funds, or other records showing reinvested dividends and cash purchases of shares; these are part of your cost basis and will reduce taxable gain when you sell shares in the fund.

46.2 Getting Ready To File Your Return

You must collect your tax records before you can start the preparation of your return. Even if you employ a tax professional to prepare your return, organizing your tax data is essential. Once you have compiled all your return information and your records are complete, decide whether to use Form 1040EZ, 1040A, or 1040 with the aid of the checklist at the front of this book on page 8. After you have decided which return to file, review the form to familiarize yourself with its details.

You may obtain IRS forms and publications online at www.irs.gov. You can obtain forms by phone from the IRS by calling (800) 829-3676.

Checking for possible errors. After you have completed your return, put it aside and postpone checking your completed return for several hours or even a day so that you can review it in a fresh state of mind. See below for common errors that might delay a refund or result in a tax deficiency and interest costs.

If filing electronically. To do this, you need your prior-year adjusted gross income (AGI) to validate your signature. If your return is rejected, read the explanation (maybe you mis-entered your Social Security number). If you have further questions, call the IRS at (800) 829-1040. Find more information at E-File Options for Individuals at https://www.irs.gov/filing/e-file-options.

If mailing your return. If you are mailing your paper return to the IRS, first check it to ensure the following:

• Your arithmetic is correct.
• Your Social Security number, and that of your spouse if you are filing jointly, is recorded correctly on each form and schedule.
• You have filled in the proper boxes that state your filing status and exemption claims, and reported the Social Security number of each dependent (21.11).
• You have claimed the full standard deduction you are entitled to if you are age 65 or older, or blind (13.4).
• You have used the Tax Table, Tax Computation Worksheet, or special capital gain or foreign earned income worksheet applicable to your tax status. If you do not have net capital gain or qualified dividends, use the Tax Table if your taxable income is less than $100,000, or the Tax Computation Worksheet if your taxable income is $100,000 or more. See 22.4 if you have net capital gain or qualified dividends. See 22.5 if you claimed the foreign earned income exclusion or foreign housing exclusion.
• You have put the refund due you or your tax payable on the correct line.
• If you owe tax and are paying by check, your check should be made out to the “United States Treasury” for the correct amount due and your Social Security number should be on the check. Send payment voucher Form 1040-V along with your payment.
• You have signed your return and, if you are filing a joint return, your spouse has also signed (1.4)
• You have attached the correct copy of your Form W-2 and all appropriate forms and schedules to your return.
• If you have elected to have your refund directly deposited into your personal account, verify that you have provided the IRS with the correct routing information on Line 76 of Form 1040, Line 48 of Form 1040A, or Line 13 of Form 1040EZ.
• You have correctly addressed the envelope and affixed proper postage.
• You use certified or registered mail or an IRS-specified private delivery service to prove that your return was postmarked on or before the filing date. See the adjacent Planning Reminder for more details.

46.3 Applying for an Extension

If you cannot file your return on time, apply by the due date of the return for an extension of time to file. Send the extension request on Form 4868 to the Internal Revenue Service office with which you file your return.

Automatic filing extension. You may get an extension without waiting for the IRS to act on your request. You receive an automatic six-month extension for your 2017 return if you file Form 4868 by April 17, 2018. The extension gives you until October 15, 2018, to file your 2017 return. A late filing penalty will not be imposed if you fail to submit a payment with Form 4868 provided you make a good faith estimate of your liability based upon available information at the time of filing. However, although the extension will be allowed without a payment, you will be subject to interest charges and possible penalties (discussed below) on 2017 taxes not paid by April 17, 2018.

You may e-file Form 4868 for free through the IRS Free File program (go to www.irs.gov). You may also file Form 4868 electronically using tax preparation software or your tax preparer may file it electronically for you. To make a tax payment, you may use a credit card or debit card (a fee will be charged), you can authorize a payment from your savings or checking account through IRS Direct Pay at www.irs.gov/Payments/Direct-Pay, or you can make a payment through the Electronic Federal Tax Payment System (EFTPS); for details go to http://www.irs.gov/payments. When you make a payment with Direct Pay, a credit or debit card, or EFTPS, you get a confirmation number that you should keep for your records. You can pay cash using PayNearMe at a local 7-Eleven, which requires you to obtain an online confirmation code from the IRS.

When you file your return within the extension period, you enter on the appropriate line of the return any tax payment that you sent with your extension request, and include the balance of the unpaid tax, if any.

While the extension is automatically obtained by a proper filing on Form 4868, the IRS may terminate the extension by mailing you a notice at least 10 days prior to the termination date designated in the notice.

Interest and penalty for late payment. You have to pay interest on any 2017 tax not paid by April 17, 2018, even if you obtain a filing extension. In addition, if the tax paid with Form 4868, plus withholdings and estimated tax payments for 2017, is less than 90% of the amount due, you will be subject to a late-payment penalty (usually one-half of 1% of the unpaid tax per month)—unless you can show reasonable cause.

Abroad on April 17, 2018. You do not get an automatic extension for filing and paying your tax merely because you are out of the country on the filing due date. If you plan to be traveling abroad on April 17, 2018, you must either request the automatic six-month filing extension on Form 4868, or request an extension along with a payment made by EFTPS, account withdrawal, credit card or debit card (see above).

The only exception is for U.S. citizens or residents who live and have their main place of business outside the U.S. or Puerto Rico, or military personnel stationed outside the U.S. or Puerto Rico, on April 17, 2018. If you qualify, you are allowed an automatic two-month extension without having to request it, until June 15, 2018. The two-month extension is for filing your return and also paying any tax due. However, the IRS will charge interest from the original April 18 due date on any unpaid tax. If you cannot file within the two-month extension period, you can obtain an additional four-month extension by filing Form 4868 by June 15, 2018. This additional four-month extension is for filing only and not payment. In addition to interest, a late payment penalty may be imposed (see above) on any tax not paid by June 15, 2018.

If you are eligible for the two-month extension but expect to qualify for the foreign earned income exclusion (36.3) under the foreign residence or presence test after June 15, 2018, you can request on Form 2350 an extension until after the expected qualification date; see 36.7.

46.4 Getting Your Refund

If you show an overpayment of tax on your 2017 return, you can have a refund check mailed to you or have the IRS directly deposit the refund into as many as three bank, brokerage, or mutual fund accounts; see below. For a direct deposit you must provide the IRS with the correct routing information for your account. On your 2017 Form 1040 or 1040A, you can apply all or part of your refund to your 2017 estimated tax; this is an irrevocable election.

Direct-deposit refund option. If you want the IRS to directly deposit your refund into only one account, just give the IRS the appropriate routing and account numbers on the refund line of your return. If you want the refund to be directly deposited into two or three accounts, File Form 8888 with your Form 1040, 1040A, or 1040EZ. You can have the refund directly deposited into a checking or savings account, an online Treasury Direct account, or even to a traditional IRA (8.1) Roth IRA, or health savings account (41.10). If you want the deposit to go into a traditional IRA or Roth IRA, you must establish the IRA before you request direct deposit. Make sure that you notify the IRA trustee if you want the deposit to count as an IRA contribution for 2017 (rather than for 2018 when the deposit is made). To count as a 2017 IRA contribution (traditional or Roth), the direct deposit must actually be made to the IRA by the April 17, 2018 due date for your 2017 return (extensions are disregarded).

You can also request on Form 8888 for your refund (or part of it) to be invested in up to $5,000 of paper series I bonds (30.15).

If you file Form 8379 (see below) for a refund as an injured spouse, you cannot use Form 8888.

Checking refund status online or by phone. You can check the status of your refund online at www.irs.gov (click on “Where’s My Refund”). You will need to provide the Social Security number shown on the return (or the first Social Security number if you filed a joint return), your filing status, and the amount of the refund. You also can check the status of your refund by downloading the IRS2Go app, by calling the automated refund information phone number (800) 829-1954, or by calling (800) 829-1040.

Form 8379: Injured spouse may get refund that was withheld to pay spouse’s debts. If a refund was due on a joint return that you filed with a spouse who owed child or spousal support, federal student loans, or state income tax, the Treasury Department’s Bureau of the Fiscal Service may have withheld payment of the refund to cover the obligations. If your spouse owed federal taxes, the refund may have been offset by the IRS. If you are not liable for the past-due payments, and your tax payments (withholdings or estimated tax installments) or refundable credits exceed your income reported on the joint return, you may file Form 8379 to get back your share of the refund.

Penalty for filing excessive refund claim. A 20% penalty can apply to an excessive claim for refund or credit on an original or on an amended return (47.8). The penalty is 20% of the “excessive” amount, the excess of the refund or credit claimed over the amount allowed, unless there is a reasonable basis for the amount claimed.

The penalty does not apply to claims relating to the earned income credit (25.6). It also does not apply to any portion of the excess that is subject to the accuracy-related penalties (including the penalty for understatements due to reportable or listed transactions), or the fraud penalty (48.6).

46.5 Paying Taxes Due

If you owe tax on a return that you are mailing to the IRS, you may pay by check, money order, credit card, or debit card. Payments can also be made by direct debit from your bank account, either by phone or online using the IRS’ Direct Pay or Electronic Federal Tax Payment System (EFTPS). For those who do not have a bank account or credit card, payment can also be made in cash, although it is not sent to the IRS or Treasury, as explained below.

If paying by check or money order, make it payable to the “United States Treasury.” Write your Social Security number on the check or money order. Attach Form 1040-V along with your payment.

A credit card or debit card payment can be made by phone or over the Internet with a service provider that handles the transaction for the IRS. The service provider will impose a fee based on the amount you are paying. Go to www.irs.gov/payments.

IRS online or phone option for making payments. The IRS’ Electronic Federal Tax Payment System (EFTPS) accepts online tax payments from individual as well as business taxpayers. You may use EFTPS to pay the balance due on your individual tax return or to pay estimated tax installments.

Payments are made by direct debit from an account that you designate when you enroll with EFTPS. Individual tax payments may be scheduled up to 365 days in advance and business taxes up to 120 days in advance. You can enroll online at www.eftps.gov.

Payments via EFTPS can also be made by phone after you enroll with EFTPS and set up a direct debit arrangement. Call (800) 555-4477 for enrollment information.

Direct Pay. Instead of registering to use EFTPS.gov or paying a convenience fee to charge your taxes (as explained below), you can use the free IRS online payment system at www.irs.gov/Payments/Direct-Pay. You authorize the IRS to withdraw funds from your checking or savings account to pay your taxes, but bank account and other information is not stored.

Pay in cash. If you do not have a bank account or credit card to use for paying taxes, you can pay cash through the IRS’ PayNearMe option at participating retailers, such as 7-Eleven stores. You must go to the Official Payments website and follow instructions to receive a confirmation of your information that will then be verified by the IRS. After you receive a payment code from the IRS via email, you can present it and make your payment in cash at your local store. This payment option costs $3.99 and is limited to $1,000 per day. Find details at https://www.irs.gov/payments/pay-with-cash-at-a-retail-partner.

Paying electronically. If you file electronically, you may pay taxes by authorizing a direct debit from your checking or savings account, or by using a credit or debit card. If you use a credit/debit card, the processing company will charge you a fee.

Installment agreements. If you cannot pay the full amount due on your return when you file, but will be able to pay the full amount within 120 days, you may ask the IRS for a short-term extension by calling (800) 829-1040. The IRS will not charge a fee for a 120-day extension, but interest will be charged and a late payment penalty (46.9) might be imposed.

If you need more than 120 days, you can request an installment agreement on Form 9465. If you owe $50,000 or less (tax, penalties and interest), you can apply online for a payment agreement instead of filing Form 9465; select “Payments” at www.irs.gov. Even if the IRS agrees to an installment arrangement, you will be charged interest and may have to pay a late payment penalty (46.9) on any tax not paid by the due date.

If you owe $10,000 or less and agree to pay the full amount owed within three years, your request for an installment agreement cannot be turned down, provided that for the previous five years, you (and your spouse if currently filing jointly) timely filed and paid the taxes due and did not have an installment agreement during that period. Under such a “guaranteed installment agreement,” you must timely file and pay any taxes due while the agreement is in effect.

If payments are not made under a three-year guaranteed installment agreement, you generally must pay the full balance due in no more than 72 monthly installments. If you owe over $25,000 but not over $50,000, you must disclose financial details to the IRS on Form 433-F (“Collection Information Statement”) unless you agree to make payments by direct debit from your checking account or by payroll deduction. If you owe more than $50,000, you must complete Form 433-F as part of your application.

The IRS may approve a request to make installment payments for less than the full amount you owe, but only after a thorough review of your financial circumstances and after you have sold assets and used home equity to reduce the tax bill. If agreed to, the IRS will reevaluate a partial payment plan every two years.

The IRS will usually inform you within 30 days if your proposed payment plan is accepted. If it is, you will have to pay a processing fee. If payments are made by direct debit from your bank account, the fee is $107, if the agreement is set up by phone or mail, but only $31 for direct debit agreements set up online. For other agreements, the fee is $225, or $149 if set up online. However, a $43 fee generally applies for individuals whose income does not exceed 250% of the federal poverty guidelines. When you apply for an installment agreement, whether on Form 9465, online (at IRS.gov), by phone, or face-to-face with an IRS employee, the IRS will automatically review the income information from your return to determine eligibility for the reduced fee. If the IRS approves a monthly installment plan without granting a reduced user fee and you think you qualify, you can request the reduced fee by filing Form 13844 with the IRS within 30 days of receiving the IRS’ acceptance notice.

If you are using an installment agreement to pay the tax due on a timely filed return (including extensions), the late payment penalty is reduced by half from .5% to .25% per month.

Offer in Compromise. If your financial circumstances are dire and you believe you will be unable to pay what you owe even with an installment agreement, you may make an offer to settle your tax debt for less than the full amount due on Form 656 (“Offer in Compromise”), as discussed in 48.10.

46.6 Handling Identity Theft

Identity theft continues to proliferate, and annually makes the IRS’ list of Dirty Dozen Tax Scams. If you know your personal information has been compromised, or suspect that it has, tell the IRS. File Form 14039, “Identity Theft Affidavit,” at https://www.irs.gov/pub/irs-pdf/f14039.pdf), to put the IRS on alert immediately. Follow the instructions for mailing the form to the IRS, accompanied by a copy of your Social Security card, driver’s license, passport, military ID, or other government-issued form of identification.

By filing this form, the IRS marks your tax account as “suspect.” Unfortunately, this will not necessarily speed up the issuance of your tax refund, but it may ease filings going forward.

Special tax identification number. If someone else is using your Social Security number to file a bogus tax return, it interferes with your filings. You can obtain an Identity Protection Personal Identification Number (IP PIN), a six-digit number, to use in place of your Social Security number on future tax returns.

You must obtain an IP PINs if:

• You lost an IRS notice (CP01A) sent to you with an IP PIN.
• You had an IP PIN before but didn’t receive a new one.
• Your e-filed return was rejected because your IP PIN was missing or incorrect.

You can choose to obtain an IP PIN if

• You live in Florida, Georgia, or the District of Columbia, which are areas that are part of a pilot program on combating ID theft.
• You received an IRS letter inviting you to “opt-in” to get an IP PIN.

To obtain an IP PIN online, you must go through an authentication process called “Secure Access Steps.” These steps are explained in IRS Fact Sheet 2016-20 at https://www.irs.gov/uac/how-to-register-for-get-transcript-online-using-new-authentication-process. (These steps were created for the Get Transcript online program but also apply for getting the IP PIN.)

Learning more about tax-related ID theft. Combating ID theft is a priority for the IRS, and toward this end it has many resources to help you.

• Fact Sheet 2016-3: IRS Identity Theft Victim Assistance: How it Works.

• Publication 4524, Security Awareness to Taxpayers.

• Taxes. Security. Together. This is a joint campaign by the IRS, state tax administrators, and the private-sector tax industry to encourage taxpayers to protect personal and financial data online and offline.

• Taxpayer Guide to Identity Theft, which is a landing page at https://www.irs.gov/uac/taxpayer-guide-to-identity-theft that contains information and links.

• YouTube video on tax-related identity theft at https://www.youtube.com/watch?v=1EvfqG-6L5w.

46.7 Notify the IRS of Address Changes

If the IRS does not have your current address, payment of a refund due you may be delayed. If you owe taxes, the IRS may enforce a deficiency notice sent to the address on your most recently filed tax return, even if you never receive the IRS notice.

To avoid these problems, you can call the IRS to update your address at (800) 829-1040. You also may file Form 8822 with the IRS to provide notice of an address change, or send a signed written statement to the IRS Service Center covering your old residence. The statement should state the new and old address, your full name, and your Social Security or employer identification number.

If you and your spouse separate after filing a joint return, you should each notify the IRS of your current address.

If after you move you receive an IRS correspondence that has been forwarded by the Post Office, you may correct the address shown on the letter and mail it back to the IRS. Your correction is considered notice of an address change.

46.8 Interest on Tax Underpayments

You may be charged interest by the IRS if you have underpaid the tax due. The interest rate, which equals the federal short-term rate plus 3%, is determined every quarter. Interest begins to accrue from the due date of the return. Interest is compounded daily except for estimated tax penalties. If you relied on IRS assistance in preparing a return, and taxes are owed because of a mathematical or clerical error, interest does not begin to accrue until 30 days from a formal demand by the IRS for the payment of additional taxes.

IRS interest rates on taxes owed are as follows:

46.9 Tax Penalties for Late Filing and Late Payment

Late filing. If your return is filed late without reasonable cause (illness, death in family, natural disaster, or other event beyond your control) and you owe tax, the IRS may impose a penalty of 5% of the net tax due for each month the return is late; see the Note below.

If your return is more than 60 days late, there is a minimum penalty, which for 2017 returns is equal to the smaller of $210 and 100% of the tax due; the $210 amount may be increased for 2018. In one case, the IRS tried to impose the minimum penalty on a taxpayer who did not owe any tax because her withholdings exceeded her liability. However, the Tax Court held that the minimum penalty does not apply unless tax is underpaid. The IRS has agreed to follow the decision.

If failure to file is fraudulent, the monthly penalty is 15% of the net tax due, with a maximum penalty of 75%.

Note: For months that you are subject to the 0.5% monthly penalty for late payment (described below) as well as the penalty for late filing, the late filing penalty is reduced by the late payment penalty, from 5% to 4.5% per month. Thus, the combined penalty for each of the first five months is 5%(4.5% + 0.5%), with the late filing penalty reaching its maximum of 22.5% in five months (4.5% x 5 = 22.5%). After five months, the 0.5% monthly late payment penalty can continue until the tax is paid but not beyond the 50th month when the 25% limit is reached (0.5% x 50 = 25%)

Late payments. If you are late in paying your taxes, a monthly penalty of 0.5% (½ of 1%) is imposed on the net amount of tax due and not paid by the due date. The maximum penalty is 25% of the tax due. The penalty is in addition to the regular interest charge. This penalty does not apply to the estimated tax (27.1). The late payment penalty does not apply if you can show that the failure to pay is due to reasonable cause and not to willful neglect.

A special reasonable cause rule applies if you obtain a filing extension. If by the original due date you paid at least 90% of your total tax liability through withholdings, estimated tax installments, or payment with your extension request, reasonable cause is presumed and the penalty does not apply for the period covered by the extension.

Unless reasonable cause is shown, the 0.5% monthly penalty also applies for failure to pay a tax deficiency within 21 calendar days of the date of notice and demand for payment if the tax due is less than $100,000. If the tax is $100,000 or more, the penalty-free payment period is 10 business days.

The monthly penalty may be doubled to 1%, if, after repeated requests to pay and a notice of levy, you do not pay. The increased penalty applies starting in the month that begins after the earlier of the following IRS notices: (1) a notice that the IRS will levy upon your assets within 10 days unless payment is made or (2) a notice demanding immediate payment where the IRS believes collection of the tax is in jeopardy. If the tax is not paid after such a demand for immediate payment, the IRS may levy upon your assets without waiting 10 days.