May, 2010 Tax Newsletter
Prepare Yourself for the Day the Tax Man Cometh
I truly believe that most people would rather have multiple root canals than get the dreaded audit notification from the IRS or state taxing authority (both referred to in this newsletter as IRS). I have found that, once the filing season ends this, along with owing tax debts, may be the two biggest concerns taxpayers have.
On the one hand, the audit concern may be well grounded, as the IRS has gone on record to warn that increased scrutiny is on the way. No surprise here, as Washington is searching desperately for ways to cut the budget deficit and the IRS is facing intense pressure to collect revenue. On the other hand, if you have filed an honest return and have documentation to support your income and deductions, there is no reason for alarm. The following tips provide sound advice, based upon my many years of experience, on how to deal with the IRS with a full deck:
o Keep comprehensive, well organized documents. I can’t stress strongly enough how important and impressive this is in the eyes of an auditor.
o Hire a competent, experienced, and scrupulous tax preparer. Be aware of preparers making promises of refunds or those putting words in your mouth about income and deduction amounts.
o Never ignore IRS letters or notices. Doing so, can result in a lien or levy against your property and can also deprive you of appeal remedies you may have. Reply to all correspondences timely and keep a record of all communications and correspondences (including telephone conversations) with the IRS. Mail correspondences should be sent certified with proof of receipt.
o Don’t wage frivolous arguments about the legality of the income tax. The courts have consistently upheld its validity and you will lose. I mention this because groups that advocate that the income tax is not legal under various theories have proliferated. I have represented several people, who had bought into these theories, in collection cases with the IRS.
o This should go without saying, but don’t ever attempt to bribe an IRS agent. As ridiculous as may sound, there are reports of these cases.
o Don’t give up without fighting the fight! Because the IRS says you owe money doesn’t necessarily mean you do. It’s easy to quit and send them a check, but there are often errors in their notices and calculations. I have had cases where clients were actually due refunds. You must, however, be practical. If the amount IRS says you owe is quite small, it may make sense just to pay it, rather than expend the time and money to fight it. As with most tax controversies, the facts and circumstances dictate the procedure to follow
For the most part the preceding tips fall under the category of “what not to do”. Here are my two most important “to do’s”:
o Get professional help! Having a highly competent tax professional represent you is a great start! There is probably no better way to keep you out of hot water. You want someone who has had vast experience dealing with the IRS, a person who knows what and what not to do and say to IRS agents. I have had clients who have attempted to represent themselves with disastrous results because of items they provided to the agent or things they said to the agent. It is extremely rare that I want my client to accompany me to a meeting with the IRS. As you might have guessed, I meet my own high standards of client representation and would be happy to assist you should the need occur.
o Retain your tax records. I highly recommend keeping you tax returns permanently. After all, how much space do they take up? One never knows when an old return may prove to be of some value. As to supporting documents, you need to keep them for at least three years from the original due date of the related return (four years if your state has a four year statute of limitations. There are a couple of important exceptions. If you didn’t report income that should have been reported and it is more than 25% of the income you did report, the time period is extended to six years. If you have not omitted income, OK but, if not, to be safe you should keep your records and documents for 6 years from original due date. Also, you should keep indefinitely documents relating to investments, real estate, home improvements, and other property that you have not yet sold. When you do sell these assets you will likely need to prove their costs
IMPORTANT: There is no time limit if you have not filed a return or if you file a fraudulent return.
BACK TO TAX TIPS LISTING