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How To Keep The IRS Off Your Back
It happens all the time. I am on an airplane. I strike up a conversation with the woman next to me. I tell her I'm an accountant. It turns out she is in network marketing. Although my newfound acquaintance has only been in the business for a couple of years, she is already making a substantial six-figure income - more money than she has ever made before.
She steers the conversation in the all-too-familiar direction, and starts peppering me with questions: "How can I save on taxes? Should I put my money in a trust? Take it off shore? Set up a pension plan? Can I write off my motorboat?"
Before answering these questions, I have a few of my own for her. "Are you keeping good records? Do you have an accountant or other tax professional helping you? Have you ever done a profit-and loss-statement so you know where you stand? Are you making sufficient estimated tax payments? Are you current with your yearly tax filings?"
"Er," a long pause ensues. "Well, no..."
At this point, I sit back and give her a little room. My fellow passenger is a tax bomb, and I just heard the ticking.
It is my experience that many people are in a situation like this woman's; they are making a comfortable income and still leaving themselves vulnerable, if the IRS were to pay a visit.
Could you be next?
Think of this article as the instructions for disarming a tax time-bomb, and making sure that even a full IRS audit would be a less painful experience.
Let me start with the Six Commandments for keeping the IRS off your back:
1) Hire an Accountant.
I know what you are thinking as you read this - "Why do I need to pay an accountant, when I can buy a tax software program for $49?" For starters, an accountant can help you get organized. He can advise you on the best way to keep records. An accountant can help you prepare profit-and-loss statements so that you can see how much money you are making and where your money is going, and help anticipate how much tax you may owe. He can advise you as to what is (or is not) deductible for tax purposes, as well as the best way to substantiate and increase your legitimate deductible expenditures. Most importantly, an accountant can keep you in tax filing compliance, the one area where most of my clients get into trouble, just by missing deadlines.
Without good records, you have no means to justify your legitimate deductions under the tax laws. Remember: in an audit, the burden of proof is on you to substantiate your legitimate tax deductions. Keep a daily calendar of your activities and receipts for all your business expenses, organized monthly. I know this sounds like it's more trouble than it's worth. Let me assure you that if you follow my advice it will be well worth the effort for two reasons:
Upon receiving a letter from the IRS, run (do not walk) to a tax professional. IRS letters run the gamut from the fairly benign inquiry to a serious problem. (As a quick rule of thumb, a certified letter usually indicates a serious problem.) For example, it's common for the IRS to lose a tax return or a payment. If you can quickly satisfy the IRS by sending them a copy, why not take care of it right away, before it becomes serious?
Another possible reason for IRS correspondence may be that the IRS has some questions regarding a tax return you filed. Let me assure you from experience that ignoring this type of letter will not make the problem go away. Instead, the IRS will proceed without you, which could eventually require you to hire someone like me to fight the government in court, or in collection.
Many clients ask me about putting their money in unincorporated business organizations, or offshore, or in gold bullion in the cellar, with the idea that then they won't have to pay taxes. When you hear something like this, there is a good chance the IRS already knows about this tax dodge. My advice is to seek a reputable third-party opinion. I know this will cost some money, but it could save you thousands of dollars in aggravation later.
The easiest way to get into trouble with the IRS is not to file your tax returns on time. Very few people who voluntarily file their tax returns get audited. On the other hand, my experience is that people who only file the tax returns after the IRS inquiry are more likely to be scrutinized. I cannot think of a single good reason to make yourself visible to IRS radar.
People tend to panic at tax time when they discover that a huge tax bill awaits. It is very tempting to start making up numbers. Resist this temptation. While it is never pleasant to owe the IRS money, submitting an obviously false return could land you in jail. A corollary is that you should also resist the temptation to make up false receipts for the IRS to look at if you are audited. I had one client get criminally charged for doing just this - so, to save $12,000 in taxes, he ended up paying $25,000 in legal fees!
Now that I have your attention(I hope), here are some basic tips on how to save money.
Everyone's tax situation is unique and here are a few hints:
Sound tax planning lets you keep more of your money - and your peace of mind.