Every year, the IRS issues a list of tax scams. The goal is to alert taxpayers to the lack of merit of certain strategies as well as letting everyone know the IRS will not accept them.

2006 Scams

The IRS has kicked out its annual list of highly dubious tax scams for 2006. Promoters often make these strategies sound credible, but they simply aren’t. If a taxpayer attempts to use one of the scams, the IRS will audit and aggressively attack the taxpayer as well as try to identify the promoter for prosecution.

The 2006 list of scams contains most of the traditional claims. There are, however, three new areas being targeted by the IRS. They and a few others are highlighted in the following list.

Two new schemes have worked their way onto the list in 2006. In recent months IRS personnel have noted the emergence of the two scams––“zero wages” and “Form 843 tax abatement”–– in which filers use IRS forms to claim that their tax bills have been wrongly inflated.

Also high on the list in 2006 is “phishing,” a favorite ploy of identity thieves. Over the past few years, the IRS has observed criminals working through the Internet, posing even as representatives of the IRS itself, with the goal of tricking unsuspecting taxpayers into revealing private information that can be used to steal from their financial accounts.
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Does Tax Season get you down?

Here are 4 simple steps that any small business owner can take to lower your tax bill this year.

STEP #1: Understand How Serious Your Tax Problem Is

Are you aware of just how much in taxes you are paying?

Here’s how much the average family spends on various consumer categories — as a percentage of income.

You must realize that it’s not how much you spend on taxes that is important, it’s how much you spend on taxes as compared to all other major categories of spending.

Consumer Spending:

How Do You Spend Your Hard-Earned Dollars?

Taxes ———————- 32.0%
Housing ——————– 16.7%
Medical Care ————— 11.5%
Food ———————– 8.2%
Transportation ————- 7.9%
Recreation —————– 5.7%
Clothing ——————- 4.1%
Savings ——————– 1.4%
Other Miscellaneous ——– 12.5%
TOTAL ——————— 100.0%

So, if you think you are being “nailed” by the government, you are absolutely right. You spend more on taxes than any other category of consumer spending.

In fact, you spend more on taxes than on food, clothing, and housing combined.

And it’s not just federal income taxes we’re talking about here. There’s also state and local income tax, payroll tax (Social Security and Medicare), sales tax, excise tax and property tax.

Maybe you already knew “intuitively” that your tax bill is outrageously high. If not, the picture I’ve just painted should thoroughly convince you that you pay too much tax, period.

STEP #2: Get The Right Attitude About Your Taxes

What do I mean by this? Well, you simply must have a certain “mental attitude” toward this whole idea of paying taxes. I’ll get right to the point — you must have an attitude about taxes that says, “Enough is enough. I’m paying way too much tax and I don’t like it. And it’s about time I did something about it — TODAY!”

After reading those numbers above, how do you feel? Doesn’t that just make you furious? If so, great, then you are on your way to solving this problem. The old cliche is true: “You can’t solve a problem until you admit you have one.”)
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Nothing leads to more gnashing of teeth than the thought of preparing your own taxes. Fortunately, there are people out there that do it for a living.

Here Are My Receipts

If the thought of preparing your own taxes makes you queasy, don’t worry. Preparing your taxes is a job that can be shipped out to others. These individuals, known loosely as tax preparers, prepare tax returns year around. Here’s a breakdown of the different types of preparers.

Basic preparers are the least trained, but the cheapest to hire. They tend to be part time workers who are individually employed our work at large out fits like the one with the letters H and R in its name. If you have a simple tax situation, like basic W2 wages and no homeownership, this can be a good choice.

Enrolled agents are a step up from basic preparers. These individuals are licensed by the IRS and must take continuing education courses to maintain their license. That being said, they are not formally educated in the field of finance or tax. Enrolled agents are typically more competent than basic preparers, but much less so than a CPA. If you have a tax situation requiring a basic 1040 filing with one or two schedules, a good enrolled agent should be able to take care of it. If you are looking for more sophisticated tax planning to cut your tax bill, a CPA is probably your best choice.
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Is higher education costing you a fortune? There may be a way to help pay for those costs with the help of education tax credits. What are education credits, who is eligible, and why should we take them? Well, let’s start with the first part of the question, and work our way to the end. Education credits are tax credits available for qualified education expenses paid by the taxpayer in the furthering of their education. Qualified education expenses are defined as an expense paid during the tax year for tuition and fees required by an eligible educational institution for student enrollment and attendance. It really doesn’t matter how you pay these expenses, only that the expenses are valid. Now, let’s give some examples of expenses that are not qualified so that you can determine those that are qualified, and how you account for these expenses. Room and board, medical expenses, student health fees, transportation, personal living expense, insurance, course-related books, supplies, equipment, or any non-academic activity or non-credit course are not qualified expenses. What does this leave? Basically: tuition and fees required for enrollment or attendance at an accredited college, university, vocational or post secondary educational institution.

If you take a tax deduction for education expenses in any other area of the personal tax return, you cannot use that expense when figuring a Hope or Lifetime Learning credit. If you received tax-free assistance, such as a Pell Grant or scholarship, you must deduct that amount from your qualified expenses; however, most scholarships and Pell grant monies are taxable, so you may be taxed, but you can also get the tax credit. If you make any prepayments of tuition, you can use the prepaid amounts on your current year’s federal income tax return, provided you have followed all other guidelines.

Now, there are two different tax credits: the Hope credit and the Lifetime Learning credit. What are their differences? Well, first you cannot take them jointly; you must choose one or the other. The Hope credit can only be taken during the first two years of college, as defined by the educational institution, enrolled at least half time and cannot exceed $1500. The Lifetime Learning Credit maximum for 2005 is $2000. This credit can be used for undergraduate, graduate and professional degrees courses. It is not based on a student’s school workload which means it is allowed for one or more courses at an eligible school. It cannot be taken in conjunction with the Hope Credit, even if your expense exceeds the Hope limitations. If your expenses exceed the Hope limitation the first two years, simply include the excess on your Schedule A.

Your tax credits are also limited by your level of income, and your adjusted gross income totals. The higher the income the less tax credit the taxpayer receives. Credits could be reduced depending on your level of income and how you file, i.e. single, married, etc. So, when figuring these tax credits, you need to consider your current student status, your income levels, and your expense levels as Hope will expire after your second year of higher education. You can take any excess expense deductions under your itemized deduction expenses on Schedule A, when Hope or Lifetime Learning is at their maximums. On a side note, you can not claim either credit for a student named as a dependent on your tax return if you used the Tuition and Fees Adjustment for that same student so it is always advisable to seek professional tax help.

Who is eligible to take these tax credits? You are eligible as a taxpayer or eligible dependent of a taxpayer that was enrolled as a student in an eligible educational institution. If you can be claimed as someone’s dependent, they will be able to claim the education credit, not the dependent. Generally, dependent students’ expenses will be claimed by their parents or legal guardians. Now, here is an interesting note: if you are a student, and you cannot be claimed as someone’s dependent, only you can take the education credit; even if you are not the person paying the expense.

Why would you take the credit? I think a better question would be why would you not take the credit? In case you haven’t noticed, it can be very expensive to attend higher education classes. For anyone seeking to further their education, receive a degree, and pursue their dream, any federal income tax credit that can be taken, is a helping hand toward achievement of that dream. Today, without furthering your education, you’re almost positively sentenced to a lifetime of minimum wage earnings, and struggling to make ends meet. A college education is the fastest route still, to a better life, better wages, and the achievement of the American Dream.