The only time you would likely have to deal with the IRS is when they want you to pay up your tax money. Dealing with the IRS can be made easier and more pleasant when you follow certain guidelines.

Firstly, you should never ignore the IRS. If they send you a letter it’s for a reason, usually to inform you of an assessment of your taxes and demand payment. So always reply to their letters or notices within their deadline (usually 30 days). The longer you ignore your business's tax problems, the larger your tax debt will grow. Currently, most tax debts compound at a rate up to 14%. If you fail to reply to the IRS, whatever assessment they calculated would be deemed final. If the IRS writes to you requesting for some document like a previous year’s tax return or inform you of some action they are about to take such as garnering your wages or levying your property, you should cooperate and provide the information that is sought. However, full disclosure may not be a good idea. You should not lie to the IRS, yet you aren't legally required to disclose anything about your finances or assets to the IRS collector unless you are formally served with a summons.

Secondly, if the IRS is assessing a revised tax liability for you, you should investigate their assessment. Then the appropriate action can be taken accordingly. For example if the IRS filed a substitute return on your behalf because you missed a tax return in any year then you should file a tax return for that delinquent year. If you are an innocent spouse being charged for your spouse’s tax liability, then you can resolve the issue by filing an innocent spouse relief. Perhaps the IRS has assessed penalties against you for which you should seek abatement or the IRS is seeking payment of taxes that were due longer than the statute of limitation (usually 10 years). Whatever the case is, you can only deal with the IRS appropriately after you have investigated their assessment.

Thirdly, assuming you have agreed to the amount of your tax liability, you should consider asking the IRS for a payment plan. In most cases, the IRS allows payment by monthly installments. But, you should remember that interest and penalties are always accumulating. You can also try to negotiate a discount on the total amount you owe.

Besides an installment agreement, there are other methods to clear tax debt such as an offer in compromise, a “not collectible” classification or file a bankruptcy petition. However, bankruptcy can eliminate tax debt only if it can be proven that the debt will severely affect your means of survival. So the other options are more realistic.

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Statistics by the IRS show that between 60% and 90% of taxpayers do not file a gift tax return despite having engaged in a transaction requiring such a return. To nab the culprits, the IRS is using records obtained from third parties such as land records maintained in state and county offices to uncover intra-family land transfers for little or no consideration. Although land records at state governments are publicly available, the percentage of such suspected land transfers is relatively small compared to the humongous volume of other records. So the IRS has put the onus on state and local governments to provide it with the relevant records.

In the event that state or local governments do not provide the necessary information to the IRS, the Inland Revenue Code expressly allows the IRS to petition for a John Doe summons “which does not identify the person with respect to whose liability the summons is issued.” In other words, the IRS can name John Doe as a defendant representing any and all taxpayers who have transferred land for little or no consideration.

However, in order to issue such a summons, the IRS must establish three things. Firstly, the summons relates to an investigation of an ascertainable group of people; secondly, there exists a reasonable basis for believing that the group of people may have failed to comply with the IR Code; and finally, the records sought are not readily available from other sources.

Although failing to file a gift tax return may have severe consequences, the reality is that the majority of examinations have not resulted in assessed tax or penalties. This is because the Inland Revenue Code bases the civil penalty amount on the amount of tax due so failure to file a gift tax return generally results in no penalty if no tax was due on the taxpayer’s gift.

But if the gift is large enough to trigger a gift tax and no gift tax return was filed, you should not wait it out hoping that the IRS will fail to assess the tax and penalties while the tax is still enforceable. This is because Section 6501 (c) (3) of the Inland Revenue Code gives the IRS an indefinite amount of time to assess the gift tax when you fail to file a return. Another action the IRS may take is to press criminal charges under Code Section 7203, although the agency has not often done so.

 

 

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If you have a hobby on which you spend money, can you claim your expenses as tax deductions? The simple answer is “no”. But there are circumstances in which you CAN claim your hobby expenses as tax deductions. The bottom line is if your hobby is deemed to be a business, then you can claim its expenses as tax deductions.

In any business, there are two categories of expenses that the IRS recognizes. They are ordinary expenses and necessary expenses. By definition, ordinary expenses are those that are common and accepted in your trade whereas necessary expenses are those that are appropriate for the business. A business, on the other hand, is an activity that is carried out for the purpose of profit. So a hobby that is carried out as a business is termed as a “hobby business”.

Hobby businesses are usually run from home and are often based on semi-recreational activities that you are fond of. Some examples are wedding photography, furniture refurbishing, a music band for hire etc. Being able to claim expenses from these activities against your taxes is the benefit of having a hobby business.

Most people with hobby businesses have steady jobs. Even if you incur a loss in your hobby business, you should declare it as the loss will not only reduce your overall taxes but may even drop you down into a lower tax bracket.
The difficult part is proving your hobby is a hobby business. If you consistently deduct your hobby business losses from your other income year after year, you'll probably attract the attention of the IRS. Make sure that the IRS will consider your hobby a real business before you start claiming deductions for the expenses.

So how does the IRS determine if your hobby is a business? They look for a few criteria

• The time and effort put into the hobby shows an intention to make a profit

• The taxpayer depends on income from the hobby as livelihood

• The causes for losses in the hobby – are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

• The amount of knowledge/expertise/experience needed to carry on the hobby as a successful business

• Whether any profit has been made from similar activities in the past

• Whether any profit has been made over the years

Here’s one popular way you can prove your hobby is a business – show a profit 3 times over 5 consecutive years. This means you should not show a loss in your hobby for 3 straight years. You may (and should) use other forms of “evidence” to show your hobby is a business, such as business cards, up-to-date financial records, a separate business bank account, a business license and permit, advertising expenses etc.

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Everyone dreads IRS audits.  The best way to deal with IRS audits is to avoid them.  Stay in the IRS’ good books.  Don’t do anything that might raise red flags with Uncle Sam.  The bottom line is to prepare an accurate tax return.  Here are some simple mistakes people make on their tax returns that are common causes of IRS audits.

  • Not listing all Forms 1099-INT, Interest Income, on Schedule B, in such a way that the computer or unskilled IRS worker could find the interest income on the return.
  • Not listing all Forms 1099-B, Sale of securities, on Schedule D.  The most common mistake I’ve seen people commit is the failure to report the transfer of money from one mutual fund to another mutual fund.
  • Not listing all Forms 1099-DIV, Dividends, at gross dividends on Schedule B and deduct the non-taxable distributions and capital gains distributions.
  • Not reporting all Forms 1099-MISC, Miscellaneous Income, on the appropriate schedule.  Also, listing non-employee compensation with wages and failing to complete a Schedule SE, Self-employment earnings triggers audits.

Another thing that causes IRS audits is mixing personal and business expenses such as meals, entertainment and travel.   The IRS presumes all expenses being claimed as tax deductions are personal unless you can prove otherwise with documentary evidence.  The same goes with the use of certain assets.  Many business owners mix use cars, mobile phones, home computers, boats, hunting leases, and vacation homes.  Each mixed-use asset carries with it stringent, detailed record keeping rules.

When you are audited, the IRS agent will want to see not only canceled checks and paid receipts or invoices, but also copies of insurance policies, contracts, calendars, logs, travel and conference agendas, journals, and diaries.  Section 280F, 280A, and 274 of the Internal Revenue Code require car logs, logs of vacation home use and who, what, where when and why of all travel, meals and entertainment.  The IRS will request to see the actual hotel bill and not merely the credit card receipt.  Credit card statements and canceled checks also need to be further supported by the actual receipts.

Even though you don’t have to have a receipt for an expense under $75, you still have to write down detailed information such as the date, time, place, name, and business purpose of the expenditure.

 

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If the IRS has audited your case and billed you for a certain amount of taxes that you feel is unwarranted, you may request for an audit reconsideration. Under Section 6404 of the Inland Revenue code, the IRS can grant you abatement of any assessment of tax and penalties or interests. Some of the valid reasons for audit reconsideration are if you 
• did not appear for an audit due to some valid reason

• moved and did not receive the correspondence from the IRS

• submitted documents that were not considered in the IRS assessment

• have new documentation to present

• were billed a tax for which the statute of limitation had passed

• did not file a tax return resulting in the IRS creating a substitute return under Section 6020(b) of the Inland Revenue code and you subsequently filed a return that showing the correct tax

• you discovered an IRS error in computation

All these apply only if you have not paid the assessed tax for which you are requesting reconsideration. If you have paid the assessment which you believe was in error, then you should file a claim for refund instead.

The documents you need to submit for an audit reconsideration are:

• A statement about the issues at hand

• Documents to support your position. You should show your Form 1099, any canceled checks, bank statements, loan documents etc

• Documents previously sent to the IRS (don’t assume they still have them)

• Copies of all correspondence from the IRS to you

It normally takes several months before the IRS takes any action on audit reconsideration requests so be prepared to wait.

If you are in a difficult financial situation or have been given the runaround by the IRS in your reconsideration request, you should contact the National Taxpayer Advocate’s Office and ask to expedite resolution of the request. This is done by filing Form 911, Request for Taxpayer Advocate Service Assistance.

Once your submission is reviewed by the IRS, the agency will inform you of the outcome i.e. whether the assessed tax will be changed. If you do not agree with the result, you can file an appeal with the Appeals Office. Alternatively, you may want to pay the assessed tax and apply for a refund. If you application for refund is rejected in whole or in part, you may ask for an Appeals conference or file a refund suit in federal district court or the Court of Federal Claims.

 

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