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Q: I just found out our 2010 federal income tax returns are going to be audited. My husband and I are both self-employed, so we each file a Schedule C. Should we hire someone to represent us, or just go ourselves? My husband prepared our taxes the last couple years.

A: The first step is to take a deep breath and stay calm. The phrase "IRS audit" strikes fear into people's hearts, but it shouldn't. Remember, an audit is not an accusation of wrongdoing, and a certain portion of tax returns are selected for audit purely by random.

The next step is to get all your records ready. Since you and your husband are self-employed, you may have claimed some business expenses as deductions, so make sure those receipts are in order. Also, any basic bookkeeping you do to keep track of income and expenses might help clarify the situation.

The third step is to decide the question of whether you need representation. If you believe you have filled out your returns correctly and paid the right amount of taxes, you may not need any help. This depends in large part on your husband's level of confidence that he knows the tax rules related to self-employment. As a middle ground, if you are at least reasonably confident in your returns, you might want to see if a serious issue results from the audit, and bring on representation only if you need to appeal a finding.

According to the IRS, there are three ways that returns are selected for an audit:

• Randomly, or by a computer formula.
• Due to a mismatch in records, such as when a W-2 or 1099 reported by a payor doesn't match what the recipient reports to the IRS.
• When related to other returns that are being audited (e.g., if someone you do business with is being audited, your return may be audited as well.)

As preparation for your audit, and to help you to decide whether to seek representation, you may want to ask why your returns were selected for audit. If you were selected at random, and you are confident in your returns and your records, then there is no reason to believe there will be a problem. Speaking of records, that is another way to get an advance sense of what interests the IRS about your returns. The IRS is likely to request certain records in connection with the audit, and what they request may give you an idea of whether the process will be routine or more complicated.

For more detail, the IRS has some helpful audit resources on its website.

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Q: I am acting as power of attorney for my mother, who is 94. I am in the process of opening a new checking account for her, and I wonder if I should be on the signature card as a cosigner, in case funds are needed immediately in the event of her death. It's no problem if she's alive, but I wonder what would happen upon her death -- would the checking account be frozen as part of her estate?

A: You raise an important issue if you are going to need to access funds from your mother's checking account immediately to pay for burial expenses. If that's the case, then simply having signing authorization on the account may not be the right solution.

Please note that laws vary from state to state, so to really nail this down you may want to consult with a local attorney. However, the following should provide you with a general overview of how these things go.

Currently, as a power of attorney, you should be able to sign for your mother during the remainder of her lifetime. You would simply present a valid power of attorney document to the bank, and have them add you as a signatory in that capacity. However, since this is your mother's checking account, it would be subject to probate laws and procedures upon her death.

Essentially, once the person's life ends, the power of attorney's authority ends and the executor's authority takes over. In order to use the authority as executor to administer the will, then you (or whoever is executor) would need to get a testamentary letter from a local court.

A testamentary letter usually involves a preliminary review of the last will and testament to confirm the identity of the executor. Obtaining one should be a fairly routine and quick procedure. However, if your concern is that there might be some immediate expenses associated with her funeral arrangements that won't be able to wait for this process, another alternative is to set up a burial trust. This sets money aside in a special trust specifically to cover funeral expenses.

A funeral home should be able to walk you and your mother through the process of setting this up, in conjunction with the bank of your choice (this would entail pulling some money out of your mother's checking account and putting it in a dedicated account for the burial trust).

Setting up a burial trust is also an appropriate occasion to make sure you have fully discussed with your mother what kind of funeral arrangements she wants. It's not a pleasant task, but it will help make sure her final wishes are kept.

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Q: I have a mortgage on a rental property in the amount of $17,000 at 7.0 percent. Refinancing would be no problem, as this is my only debt. My question is: Is there any way to lower this interest rate without the expense of a new appraisal? I think the expense of the appraisal would wipe out any savings I'd get from the interest rate, and I plan to pay off the mortgage in 18 months.

A: This kind of question is important, because it highlights the difference that sometimes exists between the theory and the practice of financial management.

On paper, of course, refinancing at current mortgage rates would be a no-brainer. In contrast to your 7.0 percent mortgage rate, current mortgage rates are below 4.0 percent even at a thirty-year term. For your purposes, given the short repayment period you have in mind, you could probably get a shorter-term loan with a mortgage rate below 3 percent.

Again, sounds good on paper, but what's different about your situation compared to most mortgage discussions is your relatively low principal balance. In the greater scheme of things, this is a good "problem" to have, but it does reduce the savings available to you by refinancing. You would pay about $958 in interest on a $17,000 balance over 18 months at 7.0 percent, and about $407 at 3.0 percent. It's easy to see how the various costs involved in processing a new mortgage could eat up the $551 differential.

The answer, then, might lie in a different approach. Under the circumstances, it might be worth dipping into a savings account to pay down your principal, if you have some kind of savings available. Of course, ordinarily it is good to keep some savings liquid in case you have an unexpected need for money, but there are three reasons it might make sense for someone in your situation to use savings to pay off some or all of the mortgage principal:

1. You can rebuild this savings in 18 months or less, since that is the period over which you would have been making a similar amount of mortgage payments.
2. Since you have no other debt, you could use a credit card for any emergency liquidity needs. This would not be a recommended long-term strategy, but as a short-term back-up in your situation, it seems viable.
3. The interest rate differential is even more compelling than the case for refinancing. Why hand a bank 7.0 percent on your mortgage while earning less than 1 percent (the rate on most savings accounts these days) on your savings?

If you don't have any likely liquidity needs for your savings in the next 18 months, this is a solution worth considering.

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Q: How can I tell if my deceased great aunt's money market account is still active? I am the executor for her estate, and in her papers I found a money market account number. I asked the bank whether this account was still active, and if not, when it was closed and who closed it. The bank told me they had no records of it because they destroy their records after three to five years. Any closure you can help me get on this would be helpful.

A: Technically, the bank's response might be accurate, but it still seems a little odd. Back in the days when paper records were the primary source of account information, it was commonplace to destroy records after a period of time for sheer space reasons. However, in the era of digital records -- which by now should stretch back quite a few years -- banks should be able to access records going further back in time, even though they may not be legally required to retain records for that long.

If nothing else, the bank should be able to tell you definitively whether the account is active. This is the most important issue here. First of all, only if the account is active does it really matter for purposes of the estate, and second, if the account is active, the bank should have up-to-date records for it.

If the bank does not show an active account with that number, it's likely that their records should be able to give a termination date, even if the information is too old to provide details on who cancelled the account.

Regarding the information about the money market account you found in your late aunt's papers, one important issue is how recent that is. If it is decades old, and the account was subsequently terminated, then the bank may genuinely have no way of knowing what became of the account. However, the information you found is from sometime in past 10 years or so, one would be hard-pressed to believe that the bank couldn't produce any information at all about it. If the information is from sometime within the past couple years, then the bank should absolutely be able to give you a complete accounting of it.

Start with a letter documenting your role as executor, and make an affirmative assumption: State that you have reason to believe that your late aunt had an account with their bank (cite the account number) and that you would like to know the status of that account. Send it by certified mail to the branch manager, and follow up with a phone call. Good luck!

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Q: I'm about to sell my private business and will have several millions to bank from the proceeds. I'm concerned that the FDIC only insures up to $250,000. Does it make sense to deposit in multiple banks, or is there a better approach?

A: If you want to be fully protected by FDIC insurance for the kind of money you mention, then most likely your only option is to spread that money out among a few different banks. This can be a nuisance, but at least it is easier than it would have been a few years ago, when the limit was just $100,000.

The question then becomes one of how to minimize the number of banks have to use. First, though, it is important to review a couple of ground rules of FDIC insurance. This insurance applies to deposits in checking accounts, savings accounts, money market accounts, and CDs. Many banks today offer a variety of investment products, and these products are not covered by FDIC insurance. So, be sure you choose one of those basic deposit products, and have the bank confirm that it is an FDIC-insured account.

Second, the basic rule governing the insurance limit is that it applies per depositor, per institution. So, if you have a checking account and a money market account in your name at the same bank, FDIC insurance only covers a combined total of $250,000. So, simply opening multiple accounts with one bank isn't the answer.

However, the definition of what the FDIC means by "per depositor" is important. A retirement account is considered a separate depositor from the accounts beneficiaries, and a husband and wife in a joint account are each considered separately. Someone in your position of selling a business might still have some money in the name of a corporate entity; this too could be considered a separate depositor if not being used immediately for personal purposes. In short, to the extent you can use retirement accounts, corporate accounts, and joint accounts to spread your money across different depositors, you might at least be able to reduce the number of banks you have to use.

As a final note, given the amount of money you are dealing with, one alternative you might have is to buy short or intermediate U.S. Treasury securities. These would have the full backing of the U.S. government, and if bought at or below par, and held to maturity, should guarantee your principal and interest. However, this would only give you the safety you are looking for if you held those bonds directly, and not through a mutual fund or other pooled vehicle.

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