From our experience working with individuals to get them out of IRS trouble, we have developed this short list of tips to stay out of trouble with the IRS. While there are many ways to get the attention of the IRS, the list below includes some of the items that would prevent a majority of the tax issues that we see. Since working with the IRS is almost always a time-intensive and costly undertaking, it’s always better to see if you can prevent any issues rather than deal with them once they have started.
1. Keep Your Address Updated with the IRS
When the IRS sends notices to the last address you provided them, they have met their legal responsibility. It is not the responsibility of the IRS to ensure that you have received the notice if you moved and did not update your address.
When you file your tax return each year, the IRS will update your record with that address; however, if you move soon after filing or in the middle of the year, then you may want to fill out Form 8822 to provide an update sooner than your next filed tax return. You can also update your address by having your tax professional call the IRS on your behalf.
2. Open Your IRS Mail and Bring it to a Professional
New clients will often arrive at our office with unopened IRS mail or with IRS mail that was sent years ago that they left with no response. IRS Notices are often time-sensitive. There are often rights you have as a taxpayer that you lose once you miss the deadline on the notice. There are also IRS notices that are not immediately urgent, and it is not necessarily intuitive to be able to tell which IRS notices are important.
We recommend having a licensed tax professional who is experienced with IRS problems and then immediately providing the professional a copy of the notices close to the time they are received. That professional should then be able to tell you quickly what needs to be done and how urgent it is.
3. Hire a Licensed Tax Professional
We also use the phrase, ‘hire a tax professional who has as much training as your hair stylist’ to convey this message because an individual must have a license to cut hair but does not need to have a license to prepare tax returns. The IRS tried to resolve this issue in 2010 when it created the Registered Tax Return Preparer Test, but the licensing process was found unconstitutional soon after. Therefore, there is still no requirement to be licensed to prepare federal tax returns. As a result, we’ll often see individuals find out too late that they were working with a tax preparer who had no credentials at all, but who advertised themselves as a tax professional. Once that ‘tax professional’ creates IRS problems for their clients, there is no licensing board to hold them responsible, and their clients are left responsible with the IRS penalties and interest as well and need to hire someone licensed to clean it up.
4. Communicate Regularly with Your Licensed Tax Professional
Once you hire a licensed tax professional (a tax attorney, CPA, or Enrolled Agent), make sure to communicate regularly with that person or team. The person or firm you hire can best help you and keep you in compliance when you’re proactively communicating with them.
Licensed tax professionals work with many clients throughout the year and will not know the information that you have not told them. It’s important to keep your professional informed on items that may be larger taxable events or other changes when (or before) they happen. As a best practice, we recommend checking in with your tax professional quarterly rather than assuming everything is handled. You know your business or personal situation best, and especially with the upcoming tax law changes, you want to make sure you’re keeping your tax professional up to date, so you have all the information you need to minimize your tax liability and stay out of trouble with the IRS.
5. Calculate and Prepay your Tax Liability
Instead of finding out whether you owe the IRS at the end of the year, it can help to estimate your tax liability during the year to ensure your tax withholding is appropriate. This is especially helpful if you know that you will have trouble with cash flow if you find out you are underpaid at the time of tax return filing.
In these instances, it can be helpful to proactively pay the IRS monthly or every time you take a distribution from your business, rather than just quarterly. One option on making this calculation is using the IRS withholding calculator. Another option is to hire a licensed tax professional to help you.
6. Separate your Business and Personal Activities
There are many reasons you do not want to co-mingle your business and personal activity. To stay out of trouble with the IRS, you do not want to co-mingle because 1) it makes it more likely that a business audit will open up a personal audit, and vice versa, and 2) it makes an IRS agent’s job more difficult during an audit, which usually requires more time and expense by you to get a fair result in the audit.
Co-mingling also almost always costs more in professional fees for both bookkeeping and tax, and we often see that proper business tax deductions may get lost due to the disorganization. Therefore, you should keep separate bank accounts and credit cards to be used exclusively for either business or personal expenses and do not co-mingle transactions between the two.
7. Keep a Binder of Supporting Documents for Each Tax Return
If you are contacted for an IRS audit, you do not want to try to gather supporting documents at that time. It usually takes much less time and money to keep the files organized at the time your return is prepared, making your job and your IRS agent’s job easier. And, in our experience, when your IRS agent’s job is easier, the audit results are usually much more favorable.
8. File Your Return Timely, even if You Cannot Pay the Tax
We will often see new clients come to us with unfiled returns, saying that they didn’t file the return because they could not afford to pay the tax. There are penalties and interest when you late pay your tax payment (1% per month), but there is an entirely separate (and very high) penalty for late-filed returns when you have a balance due on the return (5% per month for up to 5 months, with a max of 25%). So, while the penalties and interest accrue at a steady rate from late payment, by not filing your return, you will also have added a penalty of 25% of your tax liability.
9. Outsource Your Business Payroll to a Reputable Payroll Company
You are responsible for your payroll taxes. This means that if you signup with a payroll company that takes the money to pay the IRS payroll taxes but does not actually remit the taxes to the IRS, then you will still be responsible for paying the IRS.
Unfortunately, we have seen individuals fall victim to these situations, whether it’s from a payroll company that intentionally took the money, or one that was poorly organized with low cash flow. No matter the reason, when your payroll company does not send the payroll tax to the IRS, you are still responsible. In addition, the payroll tax deposit penalties are very high, sometimes as high as 10% per week that they are late. As a result, we recommend finding a larger, reputable payroll company so that you’re not at risk.
10. If You Can’t Fund the Payroll Tax, Cut Back on Staffing
Business payroll taxes carry personal liability. We often see clients prioritize paying business vendors and employees before paying the IRS, and then they later find out that the IRS will attach personal liability to the missing payroll tax. In addition, the IRS currently is much more aggressive in pursuing payroll taxes than income taxes, and they can cause serious disruption in your business. Therefore, if you can’t fund the payroll tax for your employees, then the best way to view it is that you can’t afford your employees. You either need to prioritize the IRS over other vendors or costs or reduce your staff so that you can afford your payroll taxes.
CONSULT WITH AN EXPERIENCED TAX PROFESSIONAL
At DiLucci, our experienced team of tax professionals is here to help you with your individual or business tax needs. Our services include:
- Audit defense
- Individual and business accounting
- Tax return preparation
- Internal Revenue Service tax resolution
- Negotiation with Tax Court Counsel
- Business bookkeeping
- Financial analysis
- Cashflow management
- Tax planning
As always, we’re here to help. Click here to schedule a consultation with our office and we’ll follow up with you promptly.