According to the July-August 2014 issue of AARP magazine, the average hair-stylist has 1,500 hours of training, just to cut hair. No matter how poorly a haircut is done, the impact of a job poorly done only lasts a few weeks for guys – and a few more for gals. You would think that something that would have potential criminal implications for a client/customer would require at least as much training as a hairdresser. However, it currently requires zero hours training to become a tax professional!! And there are over 400,000 of these people doing tax returns for a living that do not necessarily have any training at all in tax law. Carelessly choosing any old CPA or enrolled agent does not guarantee a good result either, but at least you would be picking someone who has passed some sort of certification/licensing exam.
- Choose a Tax Professional who has more training than your hairdresser.
H&R Block may disagree, but there is really no reason to try to use the IRS as a type of forced saving plan for a number of reasons: (1) they do not pay you any interest on your money, (2) If they disagree with your deductions, they may just keep the money, (3) if you have an outstanding tax liability, then they will definitely keep the money. That situation is even more frustrating when they keep the money regarding an outstanding tax liability that you did not know about because they are mailing the notices to the last known address they have on file (their only legal obligation) which is wrong!
It is much better to use the IRS Withholdings Calculator to predict how much money you owe them at the end of the year and have your company set your withholdings correctly. Then at the end of the year, it may be off by a few hundred dollars one way or the other, but it you will not get a $6,000 surprise like I saw one taxpayer get.
- Don’t try to have a tax refund.
When you are in business, you must have a business bank account and a personal bank account, and a business credit card and a personal credit card. Otherwise, if you have one account for everything, there are a couple of bad things that could happen: (1) An audit of your business tax returns could easily be expanded to an audit of your personal tax returns as well, (2) If your business owes money to the IRS, you may find that Alter Ego Liens have been filed against your personal assets as well because, after all, everything is one big combination of stuff anyway.
- Keep your business transactions divorced from your personal transactions.
Making the IRS agent’s job easier is just what we all want to do, right? Actually, it is. IRS agents want to close their cases as fast as possible. The easier we make it for them to do so, the more likely we are to get a positive result. However, this comment is with regards to how organized you want to be when dealing with an IRS Agent. It does not mean that you should necessarily share more information with them than you have to. Just be very organized about what you do share. Do not show up at an auditor’s office with a big box of receipts. The harder you make it on them, the harder they will likely make it on you.
- Keep up with your paperwork, so you can make the IRS Agent’s job easy.
Many people believe that if they can’t pay any of their taxes, then they shouldn’t file them, when actually the reverse is true. The Failure to Pay Penalty is only 0.5% per month. However, the Failure to File Penalty is 5% per month, 15% if they think it is willful! The message is clear; always file on time.
- Always file your tax return on time, even if you cannot pay any of it.
Payroll tax is a trust fund tax, and the IRS considers people who do not pay it to be embezzling money. If you see people who are wearing those stylish orange pajamas due to non-payment of taxes, it is usually related to payroll tax. Payroll tax is not dischargeable in bankruptcy like income tax can be. Therefore you will pay it. Your only opportunity to get out of paying payroll tax is to file for an offer in compromise, which is historically accepted only 30% of the time and must be backed up by a thorough financial analysis and a long list of corroborating documents to prove that you are totally unable to pay.
- If you can’t fund the payroll tax, fire your employees.
If the IRS does not know where you live, then they are sending your mail to the last known address they have, which actually is the end of their legal obligation. They are only legally obligated to send their notices to the last known address they have for you. Whether or not you receive it does not matter. So if your legal rights are expiring because they sent your mail to an outdated address (because you did not give them the new one), that is not their problem. It is yours!
- Make sure the IRS always knows where you live.
Always open the letters the IRS sends to you and read them in detail. If you do not understand them, then find someone who reads them for a living and ask that person to let you know what you should be doing. By all means, do not let them sit in the post office or in your house unopened. All of those letters have response dates, and if you do not respond, then your legal rights are expiring.
When you send mail to the IRS, always use certified mail with return receipt. Certified mail proves that you sent it, and return receipt proves that they got it. If you can’t prove that you sent it, then you may have a problem similar to an unfortunate client of ours who mailed in his 2006 tax return, but had no proof. When it did not arrive at the IRS after a year, his $100,000 tax liability became $125,000 as he was assessed a $25,000 Failure to File Penalty!
- Read mail from the IRS, before you do anything else and respond with Certified Mail.
Audits are about two things: (1) Do you have the tax law on your side? If your tax professional says that you do, then you should not worry about taking those deductions; (2) Do you have the proof? If you have saved the proof that you were following the tax law, then by all means take as many deductions as you can prove. Do not worry about getting audited. If you are audited, you will very likely pass through without a hitch. However, I would recommend that you scan all of your proof in an organized fashion and use an automated on-line backup service similar to Carbonite.com.
- Be very aggressive about taking deductions, but only when your Tax Professional says you have the law on your side, and you have saved the proof.
I remember mentioning to one Appeals Officer I was meeting that I bet she has the tee-shirt to prove it too. She told me that she did not have a T-shirt, but in her cubicle she does have a poster about it! (See #10)
- When interacting directly with the IRS, be very care what you say to them and what you send to them, because they record EVERYTHING.
Furthermore, don’t forget that these are the guys who took down Al Capone.
Originally featured in The OffBeat Business Magazine June 2016 issue.
John DiLucci is an Enrolled Agent and Certified Tax Resolution Specialist at Masters of Taxation, LLC. Serving business tax interests, John is well-versed with tax law and representation nationwide. Contact John@Masters-of-Tax.com to reach him directly with your questions and concerns. See their ad in The OffBeat Business Magazine.