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Dear Penny: Will My Husband’s Retirement Ruin Our Daughter’s College Plans?

February 28, 2022 by Brett Tams

Dear Penny, My husband and I have an age gap of 15 years between us. We have an 18-year-old daughter getting ready to head off to college come September 2022.Â My husband will be 63 in that same month and was hoping to retire at 65 like the rest of his siblings, but we just [â¦]

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

What Is the Arms Index (TRIN)? How to Use the Indicator

February 25, 2022 by Brett Tams

The Arms Index or Trading Index (TRIN) is a breadth indicator used to indicate when the stock market is overbought and oversold. In simpler terms, it measures how strong or weak the market is on any given day. Technical analyst Richard W. Arms developed the Arms Index formula in 1967 as a tool for gauging […]

The post What Is the Arms Index (TRIN)? How to Use the Indicator appeared first on SoFi.

Examining the Race Gap in Homeownership

February 24, 2022 by Brett Tams

Despite the Fair Housing Act of 1968 and other federal laws, a large race gap in homeownership continues to exist across the United States. The Black homeownership rate in the fourth quarter of 2021 stood at 43%, compared with 74% for non-Hispanic whites, according to the U.S. Census Bureau. A large race gap in homeownership […]

The post Examining the Race Gap in Homeownership appeared first on SoFi.

Stock Market Today: Markets Turn Tail as Ukraine Invasion Risk Rises

February 18, 2022 by Brett Tams

Ukraine-Russia tensions wrested control of investor sentiment from the Fed in a difficult session for the broader markets, which was exacerbated by a few pieces of disappointing economic news.

On Thursday, both U.S. President Joe Biden and British Prime Minister Boris Johnson warned that the shelling of a kindergarten in Ukraine’s eastern Donbas region might be a “false-flag operation” meant to give Russia an excuse to invade the country.

SEE MORE 22 Best Retirement Stocks for an Income-Rich 2022

“The evidence on the ground is that Russia is moving toward an imminent invasion,” Linda Thomas-Greenfield, U.S. Ambassador to the United Nations, told reporters. “This is a crucial moment.”

Also sending stocks in the wrong direction were a few weak reports, led by initial unemployment claims that came in at 248,000 for the week ended Feb. 12 â well ahead of expectations for 219,000 filings and up from last week’s upwardly revised 225,000.

Also Thursday, January housing starts came in shy of estimates, as did a February reading of Philadelphia-area manufacturing activity.

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“Some of January’s dip in housing starts reflects especially tough winter weather. The January industrial production report released yesterday showed utilities output jumped nearly 10% from December, even after accounting for normal seasonal swings. The severe winter weather that hit much of the country in January held back housing starts,” says Bill Adams, chief economist for Comerica Bank. “But supply chain problems also continue to restrain housing activity; one illustration of the ongoing dysfunction in supply chains is the 25% monthly increase of softwood lumber prices in the January producer price index.

Investors skittered away from cyclical and growth sectors alike, with technology (-3.0%) and financials (-2.5%) leading the way down.

SEE MORE The 9 Best Energy Stocks to Buy for 2022

There was appetite for defense plays, however, with consumer staples (+0.8%) the day’s best-performing sector.

Losses accelerated later in the day, sending the Nasdaq Composite 2.9% lower to 13,716, followed by the S&P 500 Index (-2.1% to 4,380) and Dow Jones Industrial Average (-1.8% to 34,312).

“The S&P 500 has found some footing in recent days but the options market remains skittish,” says Michael Oyster, chief investment officer for asset-management firm Options Solutions. “The CBOE Volatility (VIX), often referred to as the market’s ‘fear gauge’ is in the top 15% of its history signaling concern among sophisticated investors. Both weekly and monthly options expire this Friday, which could further spike volatility.”

YCharts

Other news in the stock market today:

The small-cap Russell 2000Â gave back 2.5% to finish at 2,028.
U.S. crude futuresÂ tanked 2% to settle at $91.76 per barrel.
Gold futuresÂ jumped 1.6% to end at $1,902 an ounce.
BitcoinÂ plunged 7.2% to $40,948.32. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
DoorDash (DASH) jumped 10.7% after the food delivery firm posted a 34% year-over-year jump in revenue to $1.3 billion and a 35% increase in total orders to 369 million. Plus, the company’s net loss narrowed from the year prior, to $155 million. “We think DASH is seeing sustained demand within the food delivery space while momentum in new verticals (convenience, grocery, and pets) (about 14% of sales) coupled with new merchants on the platform will support growth,” says CFRA Research analystÂ Angelo Zino. Still, the analyst kept a Hold rating on DASH.
Walmart (WMT) was just one of a handful of Dow Jones stocks to finish in the green, jumping 4.0% following the discount mega-retailer’s earnings report. In its fourth quarter, WMT reported adjusted earnings per share of $1.53 on $152.9 billion in revenue. Analysts, on average, were expecting earnings of $1.49 per share on $151.1 billion in sales. “We expect this momentum to continue in 2022 as consumers likely become increasingly price conscious, with inflation being at a 40-year high, noting WMT’s average price gap relative to the competition continues to widen versus pre-pandemic levels,” says CFRA Research analyst Arun Sundaram (Buy). “We also believe investors are underappreciating WMT’s evolving business model, including omnichannel transformation and its high-margin alternative profit streams (e.g., advertising is now over $2B in annual revenues).”

Find Opportunity in the Market Upheaval

The market is teeming with too many risks for volatility to just magically disappear. So for now, your best options are to defend against it â or use the dips as an opportunity to invest in longer-term trends on the cheap.

Among those trends on the skids is green energy, which despite generally growing long-term growth estimates has suffered of late; several popular green energy funds are off 40%-50% over the past year.

SEE MORE 5 Super Stocks to Stave Off Sizzling Inflation

So why now?

“Inflation and economic reopening have increased fossil-fuel prices, and alternative and clean energy returns typically rise in parallel with increasing oil costs,” says exchange-traded fund provider ProShares. “Clean energy was also a priority in the initial $2.2 billion White House infrastructure proposal, and policy tailwinds for increased spending remain.”

If you’re looking for somewhere to begin, consider this short list of 10 green energy stocks that might be down now â but are nonetheless poised to profit from an expected boom in expanded energy capacity for years to come.

SEE MORE 22 Best Retirement Stocks for an Income-Rich 2022

Chase Ultimate Rewards 10% Discount On Select Giftcards (Home Depot, AirBnb & More)

February 11, 2022 by Brett Tams

Chase Ultimate Rewards is offering a 10% discount on select gift card brands through February 28, 2022: Home Depot, Happy Moments, Airbnb, Ruthâs Chris, Spafinder, Gap Options, Golden Corral, Jiffy Lube, Build-A-Bear Workshop, Fandango, Krispy Kreme

What’s the Recovery Rebate Credit?

February 5, 2022 by Brett Tams

If you didn’t get a third stimulus check â or you only got a partial check â then you certainly want to check out the recovery rebate tax credit when you’re working on your 2021 tax return.

SEE MORE Why This Tax Filing Season Could Be Ugly

The recovery rebate tax credit and stimulus checks are joined at the hip. In fact, third stimulus checks (including “plus-up” payments) were simply advance payments of the credit. So, if the combined total of your third stimulus check and any “plus-up” payment is less than your allowed recovery rebate credit amount, you may be able to get the difference back on your 2021 tax return in the form of a larger tax refund or a lower tax bill. If your third stimulus check exceeded the amount of the credit, you don’t have to repay the difference. Either way, you win!

This helps eligible Americans who either didn’t receive a third stimulus check or didn’t get the full amount. And, in some cases, even a person who received the $1,400 third-round payment can claim a recovery rebate credit that boosts their refund or reduces the tax they owe. So, even if you’re not required to file a 2021 tax return, make sure you at least check to see if you qualify for the recovery rebate credit. If you do, go ahead and file just to claim the credit and get a refund.

Eligibility for the Recovery Rebate Credit

The eligibility rules for the recovery rebate credit are basically the same as they were for third-round stimulus checks. The big difference is that eligibility for the stimulus check was typically based on information found on your 2019 or 2020 tax return, while eligibility for the recovery rebate credit is based on information from your 2021 return. So, you could qualify for a stimulus check but not for the credit â and vice versa.

You’re generally eligible to claim the recovery rebate credit if, in 2021, you:

Were a U.S. citizen or U.S. resident alien;
Can’t be claimed as a dependent on another person’s tax return; and
Have a Social Security number (SSN) valid for employment that’s issued before the due date of your 2021 tax return (including extensions).

SEE MORE Third Stimulus Check Calculator

For married couples filing a joint return, if only one spouse has a valid SSN, you can only claim up to $1,400 for the spouse with a valid SSN. If you’re claiming the extra $1,400 for a dependent, the dependent must also have a valid SSN or adoption taxpayer identification number (ATIN). Generally, if neither you nor your spouse have a valid SSN, you can claim only up to $1,400 for each qualifying dependent claimed on your tax return. However, if either you or your spouse was an active member of the U.S. Armed Forces at any time during 2021, only one of you needs to have a valid SSN to receive up to $2,800, plus up to $1,400 for each qualifying dependent.

A person who died in 2021 or 2022 can still claim the recovery rebate credit on his or her final tax return prepared by a surviving spouse or representative if the requirements listed above are satisfied.

How to Calculate the Recovery Rebate Credit

Similar to the eligibility rules, calculation of the 2021 recovery rebate credit is generally the same as the calculation of third-round stimulus checks, except that they’re based on information from different sources. Third stimulus checks were generally based on information from either your 2019 or 2020 tax return, whichever was most recently filed when the IRS began processing your payment. If you didn’t file a return for either of those two years, the IRS sent a third stimulus check based on whatever information, if any, was available to it. In many cases, that information came from the Social Security Administration (SSA), Railroad Retirement Board, or Veterans Administration (VA) if you receive benefits from one of those federal agencies. However, the amount of your recovery rebate credit is based entirely on information found on your 2021 tax return. (Don’t include any information regarding your first- or second-round stimulus checks or the 2020 recovery rebate credit on your 2021 return!)

SEE MORE 2021 Tax Returns: What’s New on the 1040 Form This Year

As with the stimulus checks, calculating the amount of your recovery rebate credit starts with a “base” amount. For most people, the base amount for the 2021 credit is $1,400. For married couples filing a joint tax return, the base amount is $2,800 (i.e., twice the general base amount). Then you add on $1,400 for each dependent claimed on your 2021 return.

After adding up the base amount and any additional amount for your dependents, you then need to determine if your recovery rebate credit is reduced because of your income. Your credit will be reduced â possibly to zero â if you select the single, married filing separately, or a qualifying widow(er) filing status and have an adjusted gross income (AGI) above $75,000 on your 2021 tax return. If you file a joint return with your spouse, your credit will start to shrink if your 2021 AGI is over $150,000. For people who claim the head-of-household filing status, the tax credit is reduced if your AGI tops $112,500. Your credit completely disappears if your AGI is above $80,000 (singles), $120,000 (head-of-household), or $160,000 (joint filers).

Finally, after the credit is reduced (if necessary), you need to subtract the total third-round stimulus check and “plus-up” payments you received last year from the credit amount. The IRS should have sent you a notice after it sent you a stimulus check â Notice 1444-C. The IRS also sent separate notices to people who received a “plus-up” payment. You can find the proper amount to subtract on these notices. The IRS is also sending another notice â Letter 6475 â early in 2022 with the same information. You can also find the total amount to subtract from the credit on your IRS online account, if you have one. (Save Notice 1444-C and Letter 6475 with your other tax records.)

SEE MORE How to File Your Taxes for Free

You report the final amount on Line 30 of your 2021 federal income tax return (Form 1040 or Form 1040-SR). The recovery rebate credit is a “refundable” credit, which means you’ll get a tax refund if the credit is larger than the tax that you would otherwise have to pay. (“Non-refundable” credits will only take your tax bill down to zero â they won’t trigger a refund even if they’re more than the amount you owe.)

Here’s an example of how the calculation works:

Andrew and Becky reported an adjusted gross income (AGI) of $152,000 on their 2020 return. They also have one child, who is five years old. Since Andrew was furloughed from his job for part of 2021, their 2021 AGI is only $120,000. Because their 2020 AGI was above the $150,000 phase-out threshold for joint filers, their third stimulus check was reduced by $840. It went from $4,200 ($2,800 base amount + $1,400 for their child) to $3,360.Â Since their 2021 AGI is below the phase-out threshold for joint filers, their recover rebate credit isn’t reduced. As a result, after subtracting the amount of their third stimulus payment, the recovery rebate credit they report on Line 30 of their 2021 tax return is equal to $840 ($4,200 â $3,360 = $840).

There’s a page-long worksheet in the instructions for Form 1040 that you can use to calculate the amount of your credit.

Who Will Actually Get a Recovery Rebate Credit?

Most Americans already received the full amount of the 2021 recovery rebate credit as a third stimulus check payment. For those people, subtracting the stimulus money they previously received will reduce their recovery rebate credit to zero. So, if you received a full third stimulus check, there’s no need to complete the worksheet to calculate the credit.

SEE MORE How to Cut Your 2021 Tax Bill

However, certain groups of people could very well end up with a positive credit amount, which will result in a lower 2021 tax bill or larger tax refund. For example, assuming you’re eligible, you may be able to claim a recovery rebate credit if:

Your AGI was above the applicable phase-out threshold on your 2019 or 2020 tax return (whichever return was used to calculate your third stimulus check), but it’s lower on your 2021 tax return;
You added a dependent (e.g., had a new baby) in 2021;
You share custody of your child, your ex-spouse claimed the child as a dependent for the 2020 tax year, and you claim the child as a dependent for 2021;
You got married in 2021 (especially if there’s a wide gap between each spouse’s income);
You could be claimed as a dependent on someone’s 2019 or 2020 tax return (whichever return was used to calculate your third stimulus check), but not on anyone’s 2021 return;
You receive Social Security or veterans benefits, didn’t file a 2019 or 2020 tax return, and care for a dependent child, but the IRS didn’t get information about the child from the SSA or VA;
You didn’t have a SSN in 2021 but are issued one by the due date of your 2021 tax return (including requested extensions);
The IRS sent you a third stimulus check that was less than what you were entitled to receive; or
The IRS didn’t send you a third-round stimulus check at all.

These are just a few of the more common reasons why you might be able to claim a recovery rebate credit. There will be other situations that result in a positive credit amount. That’s why it’s important that you run the numbers when you file your own 2021 tax return. If you’re entitled to a refund, file your return electronically and sign up to have your refund directly deposited into your bank account to get your money the fastest.

SEE MORE “Tax Preparers Near Me”? There’s a Better Way to Find a Tax Professional

(NOTE: If you reside in a U.S. territory, don’t enter an amount on Line 30 of Form 1040 or Form 1040-SR. In general, the tax authorities in American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, and the Northern Mariana Islands will provide the recovery rebate credit to eligible residents.)

Avoid Mistakes That Will Delay Your Refund

Simply claiming the recovery rebate credit won’t by itself delay the processing of your tax return or any tax refund. However, mistakes on your return â including mistakes calculating the recovery rebate credit â can slow things down and make you wait longer for your refund. Fortunately, though, you won’t necessarily lose out on the credit if you make a mistake on Line 30 of your Form 1040.

SEE MORE 23 IRS Audit Red Flags

The IRS won’t calculate your recovery rebate credit or correct your entry if you enter $0 on Line 30 or leave it blank. The IRS will treat this as your decision not to claim the credit. However, if you make a mistake on the Line 30 amount ($1 or more), the IRS will calculate the correct amount of the credit, correct your tax return, and continue processing it.

The IRS won’t contact you before making a correction, and you won’t have to provide any additional information, but at least the IRS will send you a notice explaining any changes they make. This will also delay the processing of your return.

If you agree with the changes the IRS made, no response or action is required. If you disagree, call the IRS at the toll-free number listed on the top right corner of the notice.

SEE MORE Home Office Deduction: Can You Claim This Tax Break If You Worked from Home Last Year?

When Divorcing, What Financial Specialists Do You Really Need?

February 5, 2022 by Brett Tams

Should you get a financial specialist to help with your divorce? Most people start their divorces looking for a mediator or a lawyer, not a financial planner, so it can be a startling question.

Yet a divorce is likely to be the largest financial transaction in a personâs life. Larger than buying a house. Larger than paying for graduate school. Larger than raising a child. While marriage may have been about love, now that the flame has extinguished, divorce is about security for the future and rebuilding a financially successful life. That is why it is important to make sure that the division of assets and income is fair, meets your needs and those of your children, and allows you to thrive after the divorce.Â Â

SEE MORE Your First Tax Season After a Divorce

Divorce can be complicated to navigate, and for that you most likely need a lawyer. They are trained to help you through this complicated legal process. However, divorce contains many intricate details that can have a long-term consequence on your finances and that are beyond the education and horizon of lawyers.

Lawyers Are Important, But…

There is no question that the professional experience and skills of a lawyer are needed in navigating the choppy waters of what is essentially a legal process. There are many intricacies in the way that divorce can get handled across issues, such as child support, asset division, alimony, inheritances and trusts that need the steady hand of a skilled lawyer.

Lawyers bring you to the finish line; that’s what you pay them to do. However, people divorcing have other needs to help them move on afterward. They need to make sure that the division of assets and income allows them to pursue their goals and lead fulfilling lives. And because modern life has made professional work so intricate and specialized, you have to make sure that you get the right professional for the right job.

Divorce lawyers try to protect their clientsâ financial interests, and some do better than others. Nevertheless, few lawyers are financial experts. Itâs not part of the curriculum in law school, and it is not part of the practice of the average divorce lawyer.

Three Questions You Need to Answer

Dealing with the immediate, potential and future financial consequences of a divorce is where a qualified financial analyst can best help. A financial expert can helpÂ you succeed financially with your divorce by helping you answer three critical questions:

1. Where are you today financially?

What are your assets and your liabilities? What is the joint marital income, and what are the ongoing expenses?

Surprisingly, many people canât answer those questions precisely. As long as the bills are paid and the checking account balance is over the minimum, many are too busy dealing with the other issues of life to pay attention.

Diane Pappas, a veteran Certified Divorce Financial Analyst, observes: âA lot of times when I’m working with a couple…they won’t know what they have in retirement accounts, what kind of assets they have. Sometimes they don’t even know what kind of money they’re making. They literally have to go look at their paycheck to know what they’re getting paid.â

Itâs difficult enough to go through the process of the planning that is required in a divorce without knowing that basic information. If you don’t even know where you are today, how are you going to be able to cope with all the financial changes that will occur during the upcoming split? How will you figure out where you are going, and how to get there?

2. Where will you be the day after the divorce?

After answering the first question, itâs important to navigate your negotiations to a settlement that can help you move forward. A quick example is the decision about the marital home. Should you keep it? Should you sell it? Should you sell it LATER after the children graduate? Can you afford it? Similar questions can be asked about most other financial issues.Â That also applies to liabilities, or the debt owed on credit cards, student loans or the remaining mortgage balance. Then there is the potential challenge of making ends meet on less income.

3. Where will you be five, 10 or even 15 years down the road after the divorce?

That is the REAL measure of a successful divorce negotiation and successful post-divorce financial planning. Ignoring this question is easy because of the immediacy and stress of more pressing issues. Itâs easier just to let the process move forward, however slowly, and hope for the best outcome. But without a solid answer to this question, you will not be able to provide informed consent to this largest transaction in your lifetime.

SEE MORE Retirement and Divorce: Protecting Your Finances When Marital Bliss Turns Sour

In fact, the inability to answer this question may prevent you from closing an agreement, because you may not have the confidence to move forward.

Deferral or procrastination during a time of emotional stress is human nature, especially when you are not sure about what questions to ask and how to analyze the data. That is where borrowing the expertise of a knowledgeable professional can pay off. Getting the best divorce-related financial advice early in the process will pay dividends down that long road beyond the day that the divorce becomes final.

Common Financial Specialists Used in a Divorce

Bringing a financial expert into the process of divorce can make the difference between making an informed decision that gives you a path forward or having to pick up the pieces later. Financial experts and advisers can play a useful role in divorce financial planning. However, it can be challenging to figure out which financial specialist to pick, as they come with many different stripes and colors. Some of the major categories include:

Certified Public Accountants (CPAs) often focus on taxes. Because one of the major challenges of a divorce is to figure out the tax consequences, it is important to have that expertise on board. In addition, CPAs will sometimes also work on forensic accounting to help find hidden assets.
Business valuators get involved when the divorce case includes the ownership of a business. Regardless of the involvement of each spouse, the business is likely to be one of the most valuable assets of the marriage, one that is exceedingly difficult to divide. Using a business valuator will allow the parties to put a number to the business and facilitate the negotiation.
Certified Financial Planners (CFPs) focus on bringing the client from the present to the future, beyond the effective date of your divorce. In a divorce situation, they do so by helping to optimize a settlement offer to take care of the now, but also to position for the future. Some of the areas of focus can include retirement planning, risk management and investments. CFPs can bridge the gap between the attorneysâ focus on getting you to the divorce finish line and your need for solid post-divorce planning that will lead you to financial independence. It is a skillset that is frequently overlooked or missing during divorce negotiations.
Certified Value Builders (CVBs) are a less common specialty. They help business owners increase the value of their business. When the business owner and the Certified Value Builder are successful, the business owner is able to shore up the rest of their finances.
Certified Divorce Financial Analysts (CDFAs) are financial professionals who help couples and their lawyers arrive at a fair divorce settlement. CDFAs straddle the expertise of the tax professional with that of the Certified Financial Planner. They use their knowledge of tax law, short- and long-term financial planning and distribution of assets to help clients reach an optimal settlement. CDFAs often have other qualifications. Actually, CPAs and lawyers sometimes have the CDFA. But most often it is paired with the CFP designation. This combination of CFP and CDFA can help clients make sure that their future is well analyzed.

Letâs Recap

You most likely could use a financial specialist for your divorce. The stakes are too high. Disentangling and splitting assets require far more expertise than what a lawyer is trained in.Â Anyone involved in a divorce really should be able to answer the three basic questions of divorce: Where are you financially now? Where will you be the day after the divorce? And where will you be 15 years after the divorce?

Being able to answer these questions, especially the last one, is often beyond the scope of what lawyers do. Yet the answers are critical to making sure that you know what you are getting into and how you are going to be financially successful after the divorce.

There are many kinds of financial experts, running the gamut from tax accountants to business valuators. They may be needed for some aspects of your divorce. But the most valuable financial professionals may be the CFP/CDFA combination. They have the training and orientation to bring you to the next level: financial success after divorce.

SEE MORE In a Divorce, What Is Marital Property vs. Separate Property?

Best Personal Finance Books for Young Adults (Teens and Tweens)

February 1, 2022 by Brett Tams

Looking to prepare your kids for financial independence? Learn about the best books to teach teens about finance.

What Is the Average Retirement Age?

January 31, 2022 by Brett Tams

There are certain milestones that people expect by certain ages. By 16, you hope to hit the road with your shiny new drivers license. The first election year after turning 18, you canât wait to head to the polls. For 21-year-olds, a champagne toast is in order. Eventually, everyone stops worrying about age-related milestonesâweâre all […]

The post What Is the Average Retirement Age? appeared first on SoFi.

How to Handle an IRS Audit of Your Tax Return

January 29, 2022 by Brett Tams

Regardless of why you’re chosen, it’s quite a shock to learn that the IRS wants to examine your return. Even if you have no reason to think you did anything wrong, you can’t escape the anxiety that accompanies an audit notice. For one thing, the return being audited is unlikely to be the one you just filed. The IRS generally has three years from the due date of your return to initiate an audit. So, for example, the IRS generally has until April 18, 2022, to flag your timely filed 2018Â return for an examination.

SEE MORE 23 IRS Audit Red Flags

But, whatever you do, don’t panic! Here’s what to expect and some tips on how to proceed. Hopefully, we can lower your stress level a notch or two.

How an Audit Begins

If you’re selected for an audit, you’ll get a letter announcing your fate. The simplest auditâa correspondence auditârequires only that you mail in the records needed to verify a specified claim on your return. Over the past few years, the IRS has been doing more of these types of audits. For a field audit, an IRS agent comes to your home or place of business to go over your records. Most common face-to-face meetings, though, come during office audits, which typically take place at a local IRS office.

You’ll probably have at least a couple of weeks to prepare. If the appointment is set for an inconvenient time or you find that you’ll need extra time to pull your records together, call the IRS as soon as possible and ask for the audit to be rescheduled.

SEE MORE 20 Most-Overlooked Tax Deductions, Credits and Exemptions

The written notice will note the items on your return that are being questionedâusually such broad categories as employee business expenses or casualty lossesâand outline the types of records you’ll need to clear up the matter. Office audits are usually limited to two or three issues, so you won’t be expected to haul in all your records.

What kind of evidence do you need? Here’s what a retired IRS official with 30 years of auditing experience said when we asked him that question: “I expect to see the records you used when you prepared the tax return. You must have had some. Otherwise, how did you know you gave $5,000 to charity?”

Also, be aware that auditors are sometimes looking for more than proof of what’s on your return. They’re also interested in whether income that should have been reported on your return was left off. That could mean a review of your bank records, for instance, in search of deposits that might represent unreported income.

Audit Yourself

The best way to begin preparing for your meeting is to pull out your copy of the return being audited. Before the IRS puts your forms to the test, do the deed yourself. And to get an idea of the IRS’s methods, check to see if there’s an IRS audit technique guide for your business or industry. These manuals are designed to help IRS agents understand how various kinds of businesses work and what to look for when going over a return. That guidance can be helpful for the taxpayer on the receiving end of the audit, too.

Pore over the items being questioned and pull together the documents that support your entries. Of course, there will be gaps, but don’t automatically concede defeat. Try to reconstruct missing records:

If, as luck would have it, you can’t find the return, call the IRS office that contacted you and ask how to get a copy.
Get copies of canceled checks from the bank or duplicates of receipts or written statements from individuals who can back up your claims.
If you can’t come up with written evidence for certain entries, prepare an oral explanation.

Your records don’t need to be perfect. If you can reasonably explain how you came up with a figure that’s not fully corroborated by the evidence, the IRS may well accept it. The IRS likes to stress how reasonable audit personnel are. However, when you’re pulling together your records, remember this: The more thorough your documentation is in general, the more likely an auditor will cut you some slack on an occasional point.

Do You Need Help?

You can avoid going to the audit by hiring someone to go in your place. However, a representative must have written authorization to act for you. The IRS provides a power-of-attorney formâForm 2848âfor this purpose. Whether you go alone or hire a representative to go with you or in your place depends primarily on the issues involved. If they’re relatively simple, cut-and-dried matters, you may be able to settle things without help. However, when matters are more technical or require interpretation of the law, it’s more likely you’ll need assistance. You have to make this judgment, and it will turn in part on how you feel about going head-to-head with the IRS. If you’re scared, by all means get someone to go with you or in your place.

SEE MORE 2021 Tax Returns: What’s New on the 1040 Form This Year

If someone else prepared your return, let him or her know about the audit and ask for tips on how to get ready for it. Whether you want this person to go along may depend on how much that would cost. Although the IRS prefers to wrap up cases with one meeting, if you don’t agree with the auditor’s conclusions or need time to round up extra evidence, you can schedule a follow-up meeting. Unless you fear you might capitulate if you go to the audit alone, you may want to try to settle as many issues as you can by yourself. If disagreements remain and the amount of money at stake justifies the expense, you can take an adviser along to the next session. That way you’ll have help when you really need it but won’t have to pay for handholding while you clear up routine matters. And don’t forget that the Taxpayer Bill of Rights gives you the right to stop an audit in its tracks if you decide you want representation. If the audit begins to veer off of the topics you are prepared to discuss, for example, you can call a halt to the proceedings and seek help if you need it.

The Big Day

The key to success is being well prepared. Forget the old slapstick routine of dumping a box of canceled checks and ratty receipts on the auditor’s desk. That suggests your records are sloppy, and that’s the last impression you want to give. Remember, it’s up to you to back up the information on your return. The better organized your records, the more smoothly things will go.

SEE MORE What Are the Income Tax Brackets for 2021 vs. 2022?

Establish credibility right from the start. If you do, there’s a better chance a gap later may be overlooked. Say that the audit notice states that your interest deductions, charitable contributions, and travel write-offs will be reviewed. If you’re solid on interest and contributions but shaky on travel, try to steer the audit to your strong suits first.

Don’t go into the session looking for a fight, but don’t equate being cooperative with giving in whenever the auditor raises an eyebrow, either. If the agent tells you your records don’t substantiate a deduction, for example, ask what might suffice. Perhaps you can mail it in later.

Don’t chat your way into a problem. Keep in mind that the agent is trained to zero in on tax issues. A comment you consider totally unrelated to your return might lead you into a thicket. Defending a deduction by saying you’ve taken it in the past, for example, could prompt a review of previously filed returns; discussing the family’s cross-country driving vacation might lead the agent to recalculate the ratio of business/personal miles for your car; or bemoaning the problems that led your child to drop out of college could cost you a tax credit. Fear that taxpayers will talk themselves into trouble is the key reason many advisers recommend sending a representative to the audit rather than showing up in person.

Cutting a Dealâor Not

If you do go, above all, keep your wits about you. Don’t be pressured into settling an issue just to bring the audit to an end. The IRS argues strenuously that it doesn’t judge its agents on how much extra money their audits produce. Even so, the fact is that one of the best guides to an agent’s efficiency is the amount of additional tax he or she generates without going through all the formal assessment procedures or litigation.

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Also remember that there may be room for compromise on the issue at hand. It may save time and money all around to agree on some in-between point or even for one side to give up on one disputed item in order to win on another.

Most office audits take a few hours. You’ll spend a lot of that time watching the agent crunch numbers. When it’s over, you’ll get the auditor’s decisionâusually that you owe more tax. He or she should explain each proposed change to your return and the reason for it.

If you agree, that’s fine. But remember that the auditor doesn’t have the final say. If you disagree with a finding, tell the auditor so and restate your position. He or she may be willing to compromise to close the case promptly.

You have several options if you choose to fight on. Even if you’ve handled things by yourself so far, at this point you may need professional help. You can ask for another meeting with the auditor to present additional evidence, or you can make an informal appeal to the auditor’s boss. If you’re still unhappy, you can go to the IRS regional appeal level. Or you can take your case to court.

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