May 30, 2015

Tax issues cause some folks to act in an irrational manner. True, the taxman shouldn’t be ignored. But feared? Nah.

Here’s my list of the top five things that taxpayers are irrationally afraid of and shouldn’t be:

1. Being aggressive when it comes to deductions. You’re entitled to take deductions. C’mon, say it with me now: you’re entitled to take deductions. Taxpayers often fear that claiming tax deductions will raise eyebrows at Internal Revenue Service. That’s not true unless we’re talking really excessive as compared to your level of income – and even then, if you have the documentation to prove it, why would you care? Those charitable receipts? Use them. Kept a mileage log? Don’t let it go to waste. Paid your tax pro in 2014? Make it count. If a deduction is legitimate and you have the documentation to prove it, take it.

2. Audits. First, let’s just clear up a misconception: the random audit is not common. In fact, less than 2% of individual returns are audited. That includes those returns that include hot button tax issues or are otherwise on the IRS’ radar. Second, in most cases involving a deficiency, there is no full blown audit; in most instances, if an adjustment is necessary, you’ll be notified by IRS and asked to provide documentation (usually by mail, called a correspondence audit). If an actual audit is necessary, you’ll have plenty of notice and if you have to appear, you don’t even have to be there (your attorney or other tax professional can often go in your place so long as he or she is authorized to talk to the IRS on your behalf). Do not live in fear of a tall man in a dark suit knocking on your door, unannounced, to perform an audit at your home or business: that just doesn’t happen.

3. Not having enough money to pay your bill. I can’t tell you how many clients that I have that don’t file returns or reply to letters because they can’t pay their tax bill in full. While it’s always better to pay on time, the world won’t end if you don’t. If you can pay the full amount eventually, you can work out a payment plan with IRS (more on this later in the week). If you absolutely can’t pay the full amount (ever), there are still options including an Offer in Compromise which would allow you to pay your bill in part. Ignoring your tax bill altogether should never be an option – the IRS can garnish your wages, levy your bank account or take other actions. Don’t be scared, be proactive.

4. Correspondence from the IRS. It’s not unusual for clients to drop piles of unopened mail from IRS on my desk during an appointment. I’ve even had clients bring in suitcases filled with certified mail from IRS, unopened. When you get a letter from IRS, don’t ignore it: take a deep breath and open the envelope. It’s rarely as bad as you think. Sometimes it’s an informational letter (advising you that you might need to file a certain form, etc.), sometimes it’s simply a notice of adjustment in which case you pay what you owe or work something out (see 3 above) and occasionally, you’ll receive a notice of deficiency (again, see 3 above). What’s really important to remember is that most IRS correspondence is time sensitive – there are deadlines. You can fix the problem if you address it. Ignoring it doesn’t make it go away and usually makes it worse.

5. Making a mistake. Everybody makes mistakes – didn’t your mother tell you that? There’s no need to panic. Making an honest mistake on your return can happen, and the IRS is usually pretty amenable to working something out when it happens. In fact, if you’re up to date on your taxes and make a small mistake that results in a deficiency, the IRS will often waive any associated penalty (always ask). If you’re just plain old cheating, they’re not so nice. But mistakes? They happen. Get over it.

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