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Over the next 10 weeks I want to share some basic tax tips that can be used for year end planning or thinking about your taxes for next year.
Review All Articles in This Series: 10 Tax Tips
TAX TIP NUMBER 2. BE PREPARED
In the movie the matrix, Keanu Reaves is the chosen one to save the human race from the machines. Well, in taxation, it’s just the opposite. You do not want to be the one who gets audited by the IRS. Being audited means that you now have to take your time and the time of others such as your bookkeeper or accountant to respond to the examination. This costs you money. However, if you become the chosen one, the best response is preparation.
Preparation is what star athletes do. Preparation are what good sales presentations and negotiations are based. Preparation for an IRS examination means that you have already taken the steps to make sure that your documentation is in place. Receipts, logs, cancelled checks, books, whatever it is that is the source material behind the numbers that you have reported on your tax return. Having this information prepared and stored in the event of an IRS examination is one of the best returns you can get on your money. A lack of preparation means significantly more time being spent finding the information and taking away from money producing activities. A lack of preparation means surely there will be areas that the IRS will disallow costing you more money in taxes, penalties and interest.
Preparation is more than just giving the IRS examiners a shoebox of your stuff. Preparation means hiring the right person who has experience in dealing with the examinations. It means hiring a person who has the right legal knowledge. Why is this important. The reason is that at the examination level most of the examiners don’t have legal training. Their objective is simply to acquire facts and information. Well, sometimes, information is subject to differing interpretations and as the audit progresses it might be possible to argue that maybe what was placed on the return wasn’t put in the right category and there is an opportunity to adjust the nature of the reporting to the benefit of the taxpayer.
The most important consideration in dealing with an IRS audit is supporting factually what was claimed on the return. Most people recognize that what is put down on the return is voluntary. What the IRS is doing is making sure that what you voluntarily put on the return is accurate. The second most important consideration in an IRS audit is whether the information on the return can be justified from a legal perspective. Many tax return preparers don’t have the depth of legal knowledge and experience that a trained Tax Lawyers has. This is where the rubber meets the road. Of course, the client believes everything they have done is proper. The problem is that the depth of law in the tax arena is so complex that what people think is right may not be able to be justified in a courtroom known as the Tax Court. This difference is why it is critical to hire the right person who has the right knowledge and experience and can properly advise you whether the position that has been taken can be legally supported. I have seen many times, people don’t like the answers they are given. Unfortunately, it is knowing the answers that is reality. Being prepared with both the factual and legal information most likely will result in a favorable ending.
Preparation means when information is provided to the IRS examiner that it is done in a clean professional manner. Treat the IRS examiner with respect. Yes, they are people too. The more organized you are, the better you can address the questions of the examiner, the better off you will be because the examiner will realize that their cost to dig further into details will not provide the kind of return i.e. adjustments resulting in more tax liability. Bad answers, lack of answers, disorganized papers that don’t support what was claimed on the tax return will produce a bad result.
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