It didn't have to come to this
Every year at around this time most money web sites will throw up a list of “Top 10 Red Flags for the IRS.” The premise is that you should avoid doing some things on your tax return because you may draw unwanted attention from a nosy IRS agent that bears a shocking resemblance to SS Colonel Hans Landa (the Nazi detective from “Inglourious Basterds.” Using medieval techniques of torture (no one has ever accused the IRS of being unduly modern), he will extract compromising information, a hefty chunk of change, and your first born. Well, the madness stops here! Ignore those ridiculous lists and instead focus your efforts on legally minimizing your tax bill the smart way.
Do not defraud the government
I hate paying taxes perhaps more than any other expense. The government spends my money wastefully and sometimes, in my opinion, immorally. However, every year on April 15th I buck up and send in my 1040, my check, and a little of my blood, sweat, and tears. It simply does not pay to defraud the IRS. For me my motivation for working into the wee hours of the morning on my business is to make a better life for my family and to build assets now so that my time is my own in the future. With that in mind, I want to be on the straight and narrow so that I can be with my family and enjoy the fruits of this labor; not so easy to do behind bars or paying tax fines and penalties. So think carefully and ask yourself “Do I really look good in horizontal stripes” before you pad those expenses a little on your Schedule C.
Be aggressive
Hating to pay taxes as I do, I work hard at minimizing them as much as legally possible. Does this mean that I am more likely to be audited? Yes! Bring it on, Mr. IRS man! Well, I don’t really want an audit, they’re a pain and usually involve you spending loads of time just waiting and doing paperwork, but I don’t fear one. I am confident that every return I sign is an reasonable interpretation of the economic events of the prior year and fits within the legal parameters of the US tax code. Notice that I said “interpretation.” Of course, I present the facts in their best light for my benefit. When I am audited, there is usually some arguing, pleading and compromising and in the end I may end up paying a little more but I know that I have substance to hang my positions on, and the paper trail to prove the expenditures.
Record and document
Everyone keeps track of your income for you; your job sends you a W-2, your bank, your clients, and just about anyone else send you a 1099. But it is entirely up to you to keep track of your expenses and this is what trips up many a new entrepreneur. You see, its essential to have everything records of everything, preferably on a Quicken file or some other financial software, but if you’re audited the agent is going to want to see the actual receipts that back up each number. You may get away with credit card statements and bank statements, but most agents are old school and love to let their fingers caress those flimsy slips of paper. I bought a simple plastic file cabinet with about 10 hanging folders, one each for my 9 most common expense categories and one for miscellaneous expenses. At the end of the year I empty them and use rubber bands or paper clips to keep them in their categories. Then at the end of the third year I take them out and hurl them into the fires of Mordor.
In summary, an IRS audit should be a mere nuisance, like a rash or a bout of flatulence, and not something to be feared, like waterboarding or prostate cancer. If you truly consider yourself a businessperson you should be keeping track of your expenses anyway and only have to take the additional baby step of creating a good filing system. Plus, keep in mind that you will be making some real money as your business takes off, and that money is what really draws the IRS’s attention and makes tax planning a valuable wealth preservation tool. So how about you? Do you have any advice from your own experience getting audited? Any witty stories involving an IRS agent, a nun, and a circus clown?
One other important reason to be HONEST but take all legal deductions – Because it is the right thing to do.
Jane, you’re right, it is the morally correct thing to do. We undoubtedly need a government and that government needs revenue, although I do wish government would be more responsible with the taxes it collects.
If a lawyer and an IRS agent were both drowning, and you could only save one of
them, would you: (1) go to lunch or (2) read the paper?
I love it! Take that one into the audit with you, IRS agents love humor at their expense!