Winning at taxes is not about finding the right piece of information. It is about knowing as much as possible about your own tax situation and realizing that the IRS is simply a group of people who have an enormous job to accomplish.
Keep the scales between you and the IRS tipped in your favor by following these rules:
Always report income on your tax return that is reported to the IRS by third-party payers.
That includes wages and salary; interest and dividend income; distributions from retirement plans; sales of stocks, bonds and mutual fund shares; state income tax refunds; and Social Security and unemployment benefits.
No matter what the form of payment -- cash, checks, barter -- business owners are legally bound to report the amount paid to the IRS on a W-2 or one of the various 1099 forms. That information is carefully matched up on IRS computers, so if you don't report it, you risk being audited.
Never include unrequired forms or information.
For example, be aware of Form 8275, which you are supposed to file if you knowingly take a questionable position on your return. It is essentially a blank form, and you are expected to support your position based on IRS rulings, tax court cases and the like. As such, it gives the IRS too much advance information.
Instead, be prepared to support all the information on your return, but do not draw unnecessary attention to it.
Many tax preparers suggest including backup data with your return when you have taken a larger-than-normal deduction. My advice: Do not include this data.
The only thing you accomplish by including backup data is to bring the questionable item to the attention of IRS reviewers. Instead, let the IRS carry out its audit function its way. If your return is selected for a correspondence audit to verify one glaring item, you can submit all your documentary proof then.
File on time.
The idea that your return will slip by unnoticed because you file later than April 15 is no longer valid.
Some tax professionals argue that returns are selected for audit by August, so if you file in September or October, your return will not be selected for an audit. That is not true. Returns can be chosen for an audit at any time.
There are other reasons not to delay filing. Professional tax preparation is 25 to 30 percent more expensive after the season. A tax preparer first has to estimate the taxes due (when an extension is requested) and then, months later, do the actual calculations.
Also, if you are due a refund, you will have lost months' worth of interest by filing late.
I have been telling my clients for years that neat returns, especially computerized ones, are less likely to be reviewed than handwritten or sloppy ones. The IRS has even stated that computerized returns are preferable.
It pays to submit material for an audit as neatly as possible as well and to include only information directly pertaining to the inquiry. The more time an auditor spends on your case, the more pressure she is under to collect additional taxes.
If you are involved with IRS personnel in any way, behave decently.
When dealing with IRS employees, do not complain about the IRS, do not be rude or behave angrily and do not lie.
If you receive any correspondence from the IRS, answer it promptly. If you receive a notice of tax due and don't agree with it, or know that it's wrong, don't just disregard it. Send a letter to the IRS explaining why you think the tax is incorrect. If you can't pay the tax, send a token payment and explain that more will be coming later.
The bottom line is this: With an IRS auditor you're usually dealing with a civil service employee who is just trying to get through the day without making waves. But if you anger her with a poor attitude, she will probably try harder to get the added proof to show that you are not telling the truth.
This material is based on the book What the IRS Doesn't Want You to Know by Martin Kaplan and Naomi Weiss. Martin Kaplan has been a certified public accountant for more than 30 years. He is now a member of Geller, Marzano & Company CPAs, based in New York, whose clients include wholesalers, manufacturers and service industries.