The first thing to do is relax – about one-third of the IRS audit letters are simply requesting more tax return details and supporting documentation. Find out what’s being challenged.

Tom Herman, a former tax columnist for the Wall Street Journal says that many people automatically surrender and write the IRS a check. That’s probably a smart move if your case is complicated or you don’t have records to back it up, Herman says. But in other cases, study the letter to determine what part of the return is being questioned.

If it concerns deductions or a tax credit, send them copies of the supporting documents.

If it questions your entitlement to a tax deduction, consult a tax professional, such as an enrolled agent, certified public accountant or a tax attorney before you respond to the IRS. Study your returns – review your records. Hopefully you know exactly what’s on your tax return.

But if you merely slapped your signature on it and sent it off, take the time to comb through it and refresh your memory. It pays to keep accurate records to back up your deductions and tax credits. Those include: tax returns for the past three years, receipts and credit card statements to prove your deductions, and statements to help you track the cost basis for taxable investments.

Know what you’re up against. Ramifications of underpayment fall into these categories: penalties, interest, and jail time. The penalties can be steep, depending on the nature and intent of the underpayment. It will be less severe for negligence and more for fraud. You will owe interest if, among other things, you failed to file on time. And you could serve time in prison for the really serious tax crimes, such as tax evasion.

Make sure you apply by deadlines, Herman says.

 Generally, the chance of an IRS audit is greater if you:

1) Claim an excessive amount of itemized deductions.

2) Overstate deductions for donated items.

3) Own or work in a business that receives cash and tips in the course of doing business.

4) Claim business expenses that are large in relation to the income on your tax return.

5) Claim home office deductions.

6) Have discrepancies in W-2 and 1099 reporting.

7) Have complicated investment and business transactions.

Fail to sign your return.

Believe it or not this can raise a flag and lead the IRS to look more closely at your tax return to see what else you may have missed. If anything listed above describes your situation, seek the help of a tax professional.

The bottom line. More often than not, you will just need to clear up a math error or prove your entitlement to a deduction or a tax credit. Receiving a notice from the IRS for an audit of past tax returns is not an automatic “go to jail” card for underpayment of taxes. In fact, in some instances the IRS will end up writing you a check. Regardless, if you feel that the IRS notice takes you in over your head, consult a tax adviser.

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

If you don’t pay your taxes, the IRS can file a tax lien entitling them to claim your property. Tax liens hurt your credit score and can remain on your report for a long time. 

The IRS doesn’t place it on your credit report, but when they file a lien, it becomes a public record. This means anyone, including credit bureaus, can see the lien and report it. The amount reported is your full tax debt. The IRS doesn’t update your account balance as you pay it down, but you can get a letter from them showing the payoff.

Obviously the best thing is to never have it on your report. If you owe less than $25,000 you may be eligible for the IRS’ Fresh Start program. You can watch a brief informative video at on YouTube (youtube.com/watch?v=Q6tkbrQ4_Zw. Also, you can check out more information about the IRS debt collection process at IRS Publication 594 (www.irs.gov/pub/irs-pdf/p594.pdf).

Under the program, you would set up an installment agreement and no federal tax lien would be filed. If you owe more than $25,000, consider bringing it below that amount by transferring some or all of your tax debt to a credit card or home equity line. 

So, what are your options to have it removed? After the IRS files a tax lien, your options are much more limited. You can try to settle for less with the IRS and if they accept, they will file a release of your lien. The statute dictates that they have 30 days to release the tax lien. If that doesn’t happen, contact the IRS at 1-800-913-6050.

Keep in mind that a released lien is no longer attached to your property. Your credit report will state “released lien” for up to 10 years. 

To have it removed from your report, it must be paid in full for the IRS to “withdraw” the lien, instead of merely releasing it. The IRS doesn’t automatically erase it from your report. You will need to use a special tax form to petition the IRS to withdraw your lien. 

Uncle Sam will slap a lien on you if you don’t contact them to resolve your debt. So as soon as you receive a notice from the IRS that you owe taxes, contact them pronto.

Is your credit report too revealing?

While you may feel that your credit report contains way too much information, rest assured that some things should remain your own business.

There are some things that a credit report will not reveal about you. SmartCredit.com, a consumer education agency, says the report will not show: 

1)      How much you earn.

2)     Whether or not you have a job. But it may list current or past employers if you listed them on your credit applications.

3)     Your spouse’s credit history, if you apply for credit individually. Once you take out a loan in both of your names, it gets listed as joint debt on both reports.

4)     Your criminal offenses, unless they resulted in liens or legal judgments filed against you. Sometimes child support obligations can pop up in your report.

5)    Your medical bills will not be listed unless the debt goes to collections.

6)    Your bank or investment accounts, but it may show if your account is over drawn. 

Like it or not, your credit report is a reflection of you. If it is littered with inaccuracies, take the steps to clean it up. If it legitimately shows bad debt and poor spending habits, then it’s time to take control and clean up your act 

 Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Compare ALL airline fees. 

Many websites allow you to compare airfares but neglect to alert you about all those extra fees. NerdWallet.com has assembled this information for you and added an airline fee search and comparison tool to help you compare additional fees such as luggage fees. 

Avoid foreign transaction fees. 

Foreign transaction fees used to be a nasty surprise for international travelers. But since the passage of the Credit Card Act of 2009, credit card providers must clearly disclose all the fees. Some credit card issuers impose a flat fee per transaction while some charge a percentage of the purchase price, usually between 1 to 3 percent.  

If you travel overseas often, look for a card without a foreign transaction fee. Make sure you read the fine print because these cards often come with annual fees and other restrictions. Another option is to use your debit card or an ATM, if they have lower fees. Keep in mind that credit cards offer better identity theft protection than debit cards, which may make a credit card worth the extra fee. 

Don’t leave your frequent flyer miles to the credit card company.

According to a 2011 study from Colloquy and Swift Exchange, the average household that participates in a rewards program redeems less than a third of those rewards. To make sure this is not you, find the right rewards program in the first place. Match the reward programs with your spending habits and find out how quickly you can earn your points, especially if you will get them only for certain purchases. 

The good news is that, according to the Bankrate’s annual credit card rewards survey, last year more cards paid out rewards. 

A cautionary tale about travel insurance.
Travel insurance is supposed to protect you against a trip cancellation, medical emergency, loss of your luggage and even against your travel operator’s bankruptcy. The right plan can help keep costs down, but you will have to shop around. The best deal usually comes from a third-party insurer instead of your tour operator.

Know exactly what’s covered and what it takes to get your money back. The most frustrating thing is when you expect your coverage to cover everything, only to find out that a myriad of things are excluded. 

One last tip. Find out from your medical insurer what’s covered in case of a medical emergency, like when you step on that poor stingray in the ocean. Whether your mishap is bizarre or mundane, it helps to know what’s covered and what isn’t. 

With your travel research behind you, it’s time to take off and enjoy your respite with nary a worry about those pesky travel fees. Bon voyage!

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Transportations costs. Having your wheels at school may not be a good idea. Park your car, perhaps in your parent’s driveway, and figure out how to use public transportation. If you plan on getting a job off campus, make sure it is on a public transportation route. 

Textbooks cost hundreds of dollars. Colleges are required to provide a list of textbooks during registration, so you have plenty of time to do some comparison-shopping. Online discounters let you rent, buy or sell used books. Check out www.Chegg.com, www.phatcampus.com, www.half.com or www.textbooks.com, among others, or download or rent e-books from amazon.com. 

Entertainment costs. Fun and games can take a toll on your wallet, so definitely set a spending limit for frivolity. 

High cost of roommate envy. Your roommate may have the newest to-die-for electronic toys. But your roommate may also have more money than you. If you must have the latest gizmo, keep it real by shopping around. Check online, on campus and in town for the best values and discounts.

Health insurance

Be wary of signing up for your college’s health insurance plan, which can be more expensive than staying on your folk’s plan. Under the new health care reform, you can stay on it until you turn 26. 

Credit cards can be bad for your health. One of the biggest costs, aside from your education’s price tag, is credit card debt. Let me clue you in on a few tips to help make smart choices with credit cards.  

Don’t get one unless you can afford it.

People under 21 either have to get a co-signer or earn enough income to afford the payments. While some students get credit cards by reporting their student loans as income, that can be dangerous. Your student loan is debt and you are adding more debt to it. 

Read it before you sign it. 

I know it’s a drag, but you need to read the fine print. Credit card companies count on college students to not read anything, and to just sign up for quick access to cash. The fine print contains introductory interest rate requirements, how long it will last, the difference in the rate to draw out cash against your card and transfer balance.  

Don’t fall for the first offer.

Shop for a card with the best terms, not one that merely offers the coolest rewards. You may end up charging more than you should just to rack up rewards.  

Only get what you need. 

Too much of a credit line too soon can get you into trouble. Don’t accept an increase in your line of credit just because it is offered. 

Never co-sign for a friend. Unless you are independently wealthy and don’t mind picking up your friend’s spring break vacation tab, co-signing is a no-no. 

Pay off your balances in full.

If you don’t, you will be stuck with a lifetime of minimum payments that will pile on top of other debt. 

Learning lessons about smart choices in managing your money comes at a cost. That cost is either time spent acquiring financial savvy or a lifetime spent paying off your mountain of debt. 

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Learn to take reviews with a grain of salt. Your radar should go up when:

The site claims to have reviewed many items but in the end found only one product that passed muster. 

The endorsements look like a political campaign; either rave reviews posted by friends or a total smear campaign put up by a competitor.

Look for disclosure. If the review author has a connection to the seller and receives some sort of compensation, it should be disclosed on the site, as required by the Federal Trade Commission. 

It goes without saying that you should review feedback from end users on several different sites before making a purchasing decision 

If you suspect that a review site is a fake, report it to the Federal Trade Commission. Go to its website, www.ftc.gov, and under their “consumer protection” tab click on “file complaint.” The FTC has strengthened its guidelines to crack down on fake online endorsements and imposes hefty fines.  

Speaking of protecting your “consumer dollars,” here’s a great way to do just that. Whether it’s disputing something in your credit report or learning what your rights are when dealing with debt collector, you can now find answers to these burning questions and more on one website.

In response to fallout caused by the recent financial crisis, Congress created the Consumer Financial Protection Bureau to protect consumers from fraudulent financial practices by providing them with financial information. That’s why they launched an online tool called Ask CFPB (www.consumerfinance.gov/askcfpb).

Here is what you can find there:

1)    Straightforward explanations of financial products; tips on mortgages and other loans.

2)    Answers to questions such as, what’s a credit report, is reverse mortgage right for me, how does a foreclosure work, can debt collectors tell other people about my debt, and how do I dispute an error on my credit report.

3)    Explanation of your rights when dealing with credit card and mortgage companies.

4)    Options to address complaints about financial products such as mortgages, student loans and credit cards. 

The Consumer Financial Protection Bureau hopes to become a one-stop financial education center for the consumer. Make it your first visit on your quest for financial literacy and consumer savvy. 

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

There is a reason why small print is small. The assumption is that most of us won’t go to the trouble of actually reading it. But read it you must, as not doing so only benefits the other party. Here are some classic examples of fine print “gotchas” from consumer website Mint.com: 

Didn’t know I could opt out of a purchase.

Before you buy anything, put on your trifocals and look for a small pre-checked box that will commit you to making a purchase. 

Didn’t notify us before auto-renew sets in.

Many contracts contain provisions that automatically renew a subscription at the end of a year, whether you want to or not. There are some companies that will automatically charge you if you fail to notify them before the auto-renew kicks in. 

Credit card balance transfers are another classic example of a “gotcha.’ The offer says zero percent interest, yet the fine print states that it’s only for those with a perfect credit score and for a very short period of time. 

With summer just around the corner, many of you have started working on your travel plans. Before you click the “accept” button or sign on the dotted line, be sure to read your airline, car rental, hotel and cruise line contracts carefully. 

Christopher Elliott, travel columnist and MSNBC contributor, wrote, “There are some seemingly common-sense situations that could cause you a loss on a trip you’d think would, of course, be covered by the travel supplier. Not surprisingly, the companies aren’t always on your side.” 

Loyalty programs, such as frequent flier programs and frequent customer clubs, are fickle when it comes to changing the rules.  Don’t bank on them 100 percent. They can slash the number of miles, making them worthless. Make sure you know exactly what you have before you start booking your vacation.  

Not all in your checked luggage is covered. Think an airline will compensate you for the luggage it loses? Think again. Check the airline’s conditions of carriage and you’ll find a long list of items that aren’t covered. Elliott advises to have your valuables covered by  your homeowner’s insurance policy.

Elliott suggests you fight the airlines if necessary. “When a travel company invokes one of its ridiculous rules,” he says, “let them know you don’t think these provisions are right, and that if they disagree, you’re not afraid to ask a court for a second opinion”.

But the bottom line here is that there are no short cuts. You have to read every excruciating word (especially if there is a lot of fine print!) and ask questions. You can’t use ignorance as your line of defense. You are signing a binding contract, many of which are set up to make it difficult to extricate yourself. 

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Debt is one area that can turn into an ugly, tangled mess if you are not careful. 

But if the two of you can work together rather than waging a long and expensive battle throughout the divorce process, there is a better chance of preserving your credit. How? By focusing on strategies that preserve your credit rating, rather than wasting time trying to get even. 

Here are some ways to handle credit card debt and avoid common mistakes that can ruin your credit.  

Your best-case scenario is to pay off and close all joint accounts before finalizing your divorce. To do this, you may need to sell some assets or use a chunk of your savings or investment accounts. 

If you can’t pay off the balances right away, transfer an agreed upon portion of your joint debt onto your own credit card. If you can’t qualify for a new line of credit, ask your family to co-sign it and then transfer the balance. 

The worst-case scenario is not being able to split credit card debt up onto your individual cards. Then all you can do is pray that your ex complies with the terms of your divorce settlement and makes timely payments. 

But first, do a little homework. 

Request credit reports from the three credit agencies; (Experian, TransUnion and Equifax.) You are entitled to a free copy every year and you can download all three from www.annualcreditreport.com. 

Write down all credit card debts and how they are titled: whether you are a joint account holder or an authorized user. 

As joint account holders you are equally responsible for repaying the debt. Many divorcing couples wrongly assume that their divorce decree relieves one spouse of the financial responsibility by assigning the joint debt to the other spouse. The creditor won’t close your account simply because you had a change in marital status. You could apply for a new line of credit with the same creditor and, if you get approved, transfer your portion of the debt. 

If you were an authorized user of your spouse’s card, the credit card company may agree to remove you from the account and transform it into an individual account. All you’ve got to do is ask.  

If you are stuck on the account until your ex pays off the balance, monitor payments by asking the lender for duplicate statements. 

If you are both drowning in debt and considering filing for bankruptcy, consult with a bankruptcy attorney before you file for divorce. 

The bottom line, after a divorce, you want to sever all ties for your joint debt. That being said, I am not advocating that you start blindly selling off marital assets and wiping out bank accounts to pay off debts. You and your spouse need to be on the same page and be completely transparent. Unfortunately, there is always room for financial shenanigans. If you are uncertain, consult a family lawyer to suggest the best course of action.  

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Potentially negotiable fees:

Application fee ($75-$300) is generally non-refundable, whether you are approved or not. Online lenders are most likely to charge this fee and you should be prepared to negotiate. Coleen Leri, a senior mortgage lender with Peoples Mortgage, advises that you request to pay any fees at closing. If the lender doesn’t agree, look for another lender. 

Loan origination fee (up to 1.5% of the loan amount) is charged by some lenders to process your new account application. You can often negotiate this fee. Leri advises that you compare the rate to the fees and if the lender has an origination fee or is charging points, you should see a lower rate from that lender. Don’t be afraid to ask the lender to show you how the higher fees justify the difference in a lower payment.

Loan discount or points (0.125% – 1.0% or more of the loan amount) are used to “buy you” a lower interest rate. You essentially pay more up front, to pay a lower monthly payment. Is it a good deal? Ask the lender to show you how long it will take you to break even.

Loan processing and underwriting fees ($650-900) cover exactly what is implied. Leri cautions against lenders who charge a loan origination fee in addition to high processing fees. 

Generally non-negotiable fees:

Appraisal fee ($450 on average for a primary residence and higher for an investment property): This fee is generally a part of the application process. Sandie Guenther, a loan originator with Cherry Creek Mortgage, says that most lenders require a new appraisal in their name. “Check to see if this fee can be waived if you have a recent appraisal in your name,” Guenther suggests.

Title search and insurance ($600-$950) covers the cost to search your property’s records to verify that you are who you say you are and that there are no liens against the property. The fees are based on the home’s value; the less expensive the home, the lower the fees.  

Closing and recording fees ($350 plus $160). The title company charges to close and sign your loan documents. Recording fees vary based on the length of the deed of trust.

Prepayment penalty (one to six months’ worth of interest payments): Very few first mortgage products include a pre-payment penalty. Leri says, “Prime lenders, the biggest abusers of pre-payment penalties, are virtually nonexistent in the current market.” Just to be on the safe side, ask your lender to confirm in writing that your loan does not have a pre-payment penalty.

Much more common these days are early-closing fees (also known as early-payoff fees), which are charged if the entire loan is repaid within the first few months after the refinance. 

Before you think about refinancing, make sure you understand not only what the interest rates are but also the hidden costs associated with refinancing your loan. 

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Along with health care system changes, health care reform brings with it a lot of uncertainty. Once thing that is pretty clear is the fact that you will need to be pro-active and take control of your health care expenses. 

Tips to help trim your medical bills:

Talk to your doctor about the cost of your care, just as you would about your health. After all it’s in your best interest to come up with a plan that is affordable and manageable.

Stay in your network. Most people don’t realize how much they actually save by staying within the insurer’s network.

Get free preventive care. Many insurance plans must now provide certain preventive-care screenings without charging deductibles or co-payments. Check with your provider.

Check at work about wellness benefits. Many large employers offer discounts to employees who participate in wellness programs. Some employers may even add money to your health savings account. Make sure to sign up for your employer’s medical website e-mail alerts to find out when a lower-cost option is available. 

Save emergency room visits for true emergencies. Visit an after hours clinic instead. The cost of an emergency room visit is much higher than the cost for an urgent-care center. 

Use technology, such as the Internet and free apps: 

Compare drug costs. Sites such as DestinationRx.com will suggest ways for you to save money on meds. Enter your medication and it shows you a generic equivalent, therapeutic alternatives and how much you can save through mail order or pill splitting.

Find out what’s a fair price. There are websites such as www.healthcarebluebook.com that list fair prices for surgery, hospital stays, doctor visits and medical tests, based on the average fee of providers in your area.

Download cost-saving apps for your iPhone or Android phone. Some apps let you look up the cost of a medication and lower-cost alternatives. Some let you save medical info, explain a medical condition and list providers in your area.

Use every tax break. The IRS lets you deduct medical expenses as long as the total exceeds 7.5 percent of adjusted gross income. It’s surprising how easily you can meet that limit. Add up medical expenses of everyone listed on your tax return, medical and dental bills for you and your family.  You might be able to include some medical expenses paid for a parent, even if Mom or Dad isn’t considered your dependent. 

Contribute to a health savings account (HSA). These tax-free dollars pay out-of-pocket medical expenses throughout the year. In 2012, individuals can stash up to $3,100 into their HSAs and families up to $6,250. You can put in an extra $1,000 if you are 55 or older. Even though you can’t contribute to an HSA after signing up for Medicare, you can still use the money tax-free for many medical expenses and to pay your premiums for Medicare Part B or Part D. You now need a prescription from your doctor for over-the-counter meds to pay for them with HSA dollars, so load up on the scrips at your annual physical.  

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

While most first timers are likely to have a simple return, it’s still possible to make costly mistakes. I recommend that you use a tax preparer the first few times around. In fact, many tax professionals offer free prep for federal income tax returns. Since many young and first-time filers qualify for a tax refund, using a tax professional ensures that you receive the highest refund amount possible. 

You will need to gather all documents pertaining to your income and those supporting your deductions and tax credits. You should have received all of these documents in your mail by now. But since many consider snail mail to be “old school,” it’s possible you may have taken it for junk mail and tossed it.

Your previous employers may not be able to track you down, especially if you moved a few times last year. So make sure that your employer and financial institutions, including your student loan servicer, all have your correct address. 

Even if you have a few returns under your belt, make sure you don’t miss any deductions. Here are a few commonly overlooked tax deductions:

Child-care tax credit

You can qualify for a tax credit worth 20 percent to 35 percent of what you pay for child care while you work, for children under age 13. 

Student can deduct student-loan interest paid by parents

Even if parents pay back student loans for their child who’s not claimed as a dependent, the child can qualify to deduct up to $2,500 of student-loan interest paid by Mom and Dad.

Job-search expenses

If you looked for a job last year, you can deduct your job-search expenses such as food, lodging and transportation, employment agency fees, cost of printing resume, postage, etc.

There are rules that govern each deduction or tax credit, so when in doubt, visit the IRS website (www.IRS.gov) or consult a tax professional. Rookie or not, you may want to take a quick refresher by reading Publication 17, the Tax Guide for Individuals, posted on the website. 

Unfortunately Uncle Sam is not the only one after your money; tax season is when scam artists are in their glory. Here are a few tips to help guard against identity thieves. 

Fake tax refund notices are popular among scammers. You don’t need to fill out any special forms to get your refund. If you are in doubt whether you are receiving a refund or not, call the IRS at 1-800-829-1040. 

Fake W-2 notices are another favorite among scam artists. In this case, you are asked to update your personal information on the linked W-2 form. If you fall for this, you have just given identity thieves all your information to hack into your financial accounts. Plain and simple, the IRS won’t send you unsolicited emails asking you to provide personal information. When you receive email messages purportedly from the IRS, report the email to the IRS at phishing@irs.gov. 

Finally, if you use a tax professional to do your taxes, pick someone reputable. Ask your friends and check with the Better Business Bureau before you make a decision. Remember you are ultimately responsible for what is on your return.    

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.