I was browsing the library a few months ago, looking for some accounting books, when I came across a book entitled Keep Your Hard-Earned Money: Tax-Saving Solutions For The Self-Employed. It was clearly a bit dated, as it boasted about ‘including the 1997 tax law changes’.
Now, if you are looking for a book about aggressive tax-reducing tactics that skirts right on the edge of the legal vs. illegal (and hints past it), then this is your book. How it saves you money is by helping you “convert everyday living expenses into business deductions”. The motto of this book is “When In Doubt, Deduct”. We’re talking vacations, last night’s dinner, everything. I definitely wouldn’t feel comfortable doing some of the stuff in this book. However, I did learn a couple of new legitimate business deductions.
Let’s face it. I’m afraid of getting audited. You’re probably afraid of audited. That’s exactly how the IRS likes it. Why? First of all, due to manpower restraints, only about 1-3% of tax returns get audited. And according to this book, 80% of those audited either resulted in a refund, no extra taxes being paid, or a compromise. A compromise means that the IRS questioned some of your business deductions, but in the end they compromised on the amount due instead of just completely disallowing it. In other words, even if you go too aggressive and get audited, you still have good chance of coming out ahead.
However, instead of taking this as a reason to go nuts with iffy deductions, I think it shows that while the IRS runs on a ‘guilty until proven innocent’ system, it doesn’t automatically find everyone guilty. If you have proper proof, you shouldn’t worry. They are not necessarily evil, but they are also not going to just take your word for it. (Would you, if you were them?) Learn the rules, follow them, keep records, and take that deduction!
There are two terms you should be aware of the differences of: tax avoidance vs. tax evasion.
Tax Avoidance is perfectly legal. The courts have stated clearly that you have no duty to pay more taxes that what is minimally required by law. You have every right to take all legitimate deductions and also to structure your business to minimize taxes.
Tax Evasion is a crime. This involves fraud, misreporting income, or taking deductions that you do not qualify for.
I’m all about the tax avoidance, and I’ve been reading a lot of mind-numbingly boring tax books on the subject.
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I think a good part of the fear of audits isn’t just having to pay taxes that you were supposed to pay but the pain of going through an audit. Getting to be one of those 1-3% of people isn’t exactly an award. Even if you end up getting a refund, you’ll likely still hate having gotten audited!
True, I need an audit like I need another hole in my head. I guess my message is to not give up a deduction that you deserve because of that fear.
I feel that if I ever get audited, I can successfully defend all of my deductions.
But one thing I have to wonder though, isn’t the audit rate a lot higher than quoted? I think this is because about 1-3% of tax returns get audited every year, but then other years I would believe that the same people are not constantly audited, so many different people are audited over many years.
http://www.taxmama.com is a site run by a CPA that specializes in Small Business Taxes that provides a LOT of good advice on this subject. I’ve been following that site since I became self-employed 8 years ago.
Basically, document everything, make sure the business benefitted by the expenses and don’t leave any money on the table by leaving out a tax deduction.
She gave a great example of how to turn a vacation into a tax deductible expense, via documenting that you conducted significant business research, networking, etc during the trip. BUT, being careful to separate the actual business expenses from the personal ones.
SO, let’s say you research local real estate investments whilst you’re on vacation. Deduct the lunch you purchased while doing the research, but not the romantic dinner for you and your wife later on that night.
The real secret is that when you’re self-employed, a lot of expenses you think of as being purely personal are actually deductible as they do benefit the business in some way. At the same time though, don’t buy a Plasma TV and put it in your home office, the IRS is unlikely to fall for that.
-Mark
I’ve found the same to be true in the past, fear of an Audit has prevented me from claiming deductions that I am fully entitled to claim. Recently I am trying to go through all my returns and make sure I am claiming everything I can, it can mount up to a considerable figure over a year.
Everybody should be aware that if you are audited even ONCE, you will be looked at for years and years to come. My father was audited due to his high church donations…that was 6 years ago….he has been contacted EVERY. SINGLE. YEAR. SINCE! Just be careful.
The real problem with being audited is that the IRS will try to “plea bargain” with you. If you refuse to make a deal, then the really detailed audit of *everything* will be threatened. Anyone who is smart is going to bring an accountant and/or lawyer in to represent them with the IRS throughout this process (at least if there is any serious money on the table). That becomes costly, and so you tend to see the wisdom of cutting a deal.
Unfortunately, this means that even if you are completely legit on all your expenses, etc, you still will be threatened with the detailed audit if you don’t pay! Look at it this way — the agent needs to justify their time. If they don’t get money from you, then they have “wasted” their time….
My former partner was audited, and the IRS agent was questioning the silliest of things, like telling her that the business calls she took at 9pm couldn’t possibly be business calls … after all, it was 9pm, and no one makes business calls at that hour! (Yes, this is really what they said.) In the end, she cut a deal to pay the IRS a bunch of money she didn’t really owe, simply to prevent the more detailed investigation, which would have cost her a fortune in professional fees, not to mention the stress and the loss of her time to the process!
Don’t expect to be safe, just because you have records. On the other hand, *do* keep the best records you can — they saved my company tens of thousands of dollars when we were audited! (And, yes, we were forced to cut a deal with them, in order to stop running up professional fees….)
Finally, self-employed people are audited at a significantly higher rate than the general population. (I’ve seen figures as high as 5%.) It makes sense, as the IRS knows that self-employed people have more opportunities to “bend the rules.”
One of the rarely noted international law experts (in his own rights) of our times (in India) often used to emphasise in no unmistakable terms that most of the court litigation (with a pointed reference to litigation on tax) worldover was ‘lawyer stimulated’.
The reasons – when one comes to seriously think of it – could be many. Mainly they are,: – 1) for obvious reason, the court (MY Lord) cannot, rather ought not, be expected to know ‘the law’ in anyone matter in dispute, and 2) it is the duty of the lawyer (learned professional) on his legs to try, strive and explain – what is ‘the law’ / ‘is not the law’. depending on whether he represents the State or the Subject.
Deplorably, by and large, the realities are, – a) the ‘law maker’ is known to have cetain inherent, rather time proved, weeknesses, so much so, ‘the law’ is , deliberately or otherwise, left as vague, ambiguous, and anamalous, as the terms signify / humanly possible; and (b) ‘knowledge’ is invariably taken to connote, though disgustingly so, merely ‘knowing which side of the bread is buttered’.
No wonder – there is an overwhelmingly increasing number of legal (or illegal) disputes suffocating the courts.
There is no gainsaying that, in recent times, the related or connected issues arising from the tax treaties between the nations, and the countries’ conflicting individual domestic laws, have resulted in the enormous weight of the number of disputes, of varying types, under which the judiciary is literally groaning.
No need to add and stress that, just as taxpayers, the law experts and advisers too are left clueless.
Overall, ‘justice’ is delayed : denied / impaired.
just to cut it short, will you please use name simplified to – swami
One thing I run into all the time in my bookkeeping business is so simple that it is repeatedly overlooked.
IRS agents have a job – Yes, however, they are also human beings. Behavior on your part that demeans them, challenges them or ignores their effort and energy will (often) result in a demonstration of their own due diligence to hard rules, and bad behavior.
Often negotiations break down because people fail to acknowledge them as human beings, but instead as whipping posts to be abused. Once tempers flare, the game is over – You lose.
Yes, send a professional in your place to handle an IRS audit, but take over the parts you can handle yourself, like phone calls to arrange the meetings, correspondence, copies of paperwork, . . . and anything else you can do.
You’ll cut costs with your accountant and glean some respect from an IRS agent in return. I you get caught trying to answer a question and you really aren’t sure or do not know the answer – Say so and ask the agent if they wouldn’t mind if you wrote that question down so that you can get them an answer at a later date – usually within 72 hours (or sooner). Write the question down, ask -also – if you can forward the question to your CPA to answer for you and if they ask you, “why” tell them because you were not prepared to answer that (particular) question at this time and you do not want to appear to be uncooperative or answer incorrectly and foolishly and waste their time.
So, if you find yourself having to return a phone call from an IRS agent, or are scheduled for an audit, buy yourself a bright and cheerful bouquet of flowers and place them within your line of vision, grab a special and flavorful cup of coffee, pick up the phone, make that call and smile out loud so that you project that into the phone and the person you are talking to. Say, “Yes, please and No thank you,” often and above all – Do not resort to bullying tactics or name calling and be sure to keep the sighing out loud and the, “Sheesh,” “Oh Jeez,” “Oh Brother’s,” and “!uc* You’s,” to yourself! When you are on the phone use sign language for that!
IRS agents are human and they will treat you nicely but their rule of thumb is (as determined by experience and job requirement), “You First!”
Sorry to rant, but I know that this tactic works better than any other – Always.