4 Things you should know about your own income tax return

by Tony Novak, CPA, MBA, MT     April 16, 2015

Before you put away your tax file and forget about the entire topic until next year, it might pay to spend a few minutes on an analysis that can pay big dividends in the long run. I suggest that every tax filer should be able to answer these four basic questions about their own tax return:

1) What does it say? - You should be able to summarize your own tax situation in one or two sentences including what type of income or transactions triggered the tax that you owe, what factors reduced it, and how it was paid. If you can’t then perhaps this is an indication that a bit more attention is warranted for this significant and permanent fact of your financial life.

2) What factors could change the amount of tax due? - Recognize that the structure of our tax system means that if five different people prepare the same tax return with the same set of data, there will be five different amounts of tax calculated. Four of these five tax returns will be accepted by IRS. Recognize that diversity and the reasons for it. Most important, recognize how these factors would apply to your tax return.

3) What are my most significant audit risk factors? - Risk of audit varies dramatically from less than 1 percent to almost 100 percent probability. A short list of factors greatly increases the risks so it is important to understand how these affect you. Also, I find that it helps to make written notes of any unclear or questionable tax positions in your tax return and the strategy and resources available for a response while the issue if fresh in your mind.

4) What long term strategies would reduce my tax liabilities? - Tax shelter strategy suitability and effectiveness vary depending on your income tax position and other individual factors. It helps to consider the full range of financial planning options and which are most appropriate for your situation.

I offer a flat fee income tax review/tax planning consultation that can help expand on this line of thinking that can be exercised by telephone or Skype. This service is often requested as a second opinion or to help expand understanding of specific issues. While the service is offered to taxpayers are all levels of income and can be valuable regardless of income level, there are many reasons why tax planning is now primarily of interest only to higher income tax filers.