Three (Incredibly Simple) Rules To Keep The IRS Away

Avoid An Audit We all have to pay taxes and no one wants any trouble. Follow these three simple rules and you’ll reduce your chances of grief from the IRS:

1. Keep Good Records. You might think good records help only if you’re audited. Actually keeping good records can keep you out of trouble in the first place. See Keep Tax Records In The Vault! Most audits are by correspondence: your deductions will be disallowed unless you produce records substantiating them. To respond quickly and thoroughly, be prepared.See Got A Tax Notice? Here’s What To Do.

Tax Return Filed? Now Consider Your Records

2. Respect Those 1099s. Much of what the IRS does is information return matching–the endless correlation of taxpayer identification numbers and payments. Even small mismatches will be caught and can trigger bigger problems. There are different Forms 1099 for miscellaneous income (Form 1099-MISC), interest (Form 1099-INT ), etc.

How you handle them year round matters. Don’t just stick them in a drawer when they arrive, look at them. If you receive an incorrect 1099 (as is common), contact the payor that issued it. Explain the error and ask if they have already sent a copy to the IRS. If they have, ask for a “corrected” 1099 (there’s a special box for this).

You need a system to record and track 1099s. That’s exactly what the IRS does.

3. Keep Business and Personal Separate. You may do things with a dual motive like a pleasant lunch with a business colleague, a boondoggle with your best customer or buying a vacation home you also intend as an investment. But your tax life will be easier if you avoid morphing personal into business, including:

  • Deducting the cost of your divorce because your business is at risk;
  • Deducting a miserable vacation with a client; or
  • Claiming your hobby was really for profit.

It’s safer to separate your business and personal lives. Simple but effective.

Got A Tax Notice? Here’s What To Do

Every year the IRS sends millions of letters and notices to taxpayers.  The increasingly web-savvy IRS has released IRS Summertime Tax Tip 2011-22.  It’s worth a review, providing the agency’s own tips on dealing with its own correspondence!  I’ve summarized and supplemented it here.

  •  Don’t Panic.  Many letters and notices are simple and painless, merely saying what the IRS did, received, or has on file.  For more about IRS bills and Notices, see IRS Publication 594, The IRS Collection Process.
  • Read Carefully.  Each letter or notice may request payment, notify you of a change or request additional information. If you receive a correction notice, compare it with your return.
  • Need More Time?  Often, the IRS can grant an extension of time to respond but you must ask.  If you ask, confirm it in writing.  In some cases, no extension is possible, such as the 90-day deadline to file in Tax Court after a Notice of Deficiency can’t be extended.  No Reply Needed?  If you agree with the IRS, no reply is usually necessary—unless a payment is due.  Sometimes the notice will say you will be billed. Sometimes you can expedite billing (to reduce interest charges) if you sign and return the notice indicating your agreement.  But be careful and make sure you want to agree rather than to dispute it.
  • Don’t Agree?  If you don’t agree with the IRS, write to explain why.  Include documents and information along with the tear-off part (or copy) of the notice.  Mail it to the IRS address on the notice.  Allow 30 days or longer for a response.  Keep a copy of everything you send.  See more about disputes here.
  • Call or Write.  While writing can be better, you may need to call the number on the notice.  Have a copy of your return and correspondence handy.  Whatever you do over the phone or in person, document it.  You can ask IRS representatives to write you confirming what they said, but don’t assume they will.  The IRS is a huge agency.  If you’ve called and obtained a 30-day extension, send a short letter confirming that’s what the IRS agreed, including the name (and/or badge number) of the person you spoke to on the phone.
  • Getting Help.  Pick your battles.  If a tax bill is small, rather than risking bigger problems, pay the bill and move on.  Of course, what is small to one person is major to someone else.  But at least consider whether you’re truly better off contesting it. .

Also consider professional help.  A tax lawyer or accountant may do a better job than you can.  Especially if the tax point is big or involves bet-the-company stakes, get some help.

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