Are you a Tax Time Bomb?
        How To Keep The IRS Off Your Back

It happens all the time. I am on an airplane. I strike up a conversation with the woman next to me. I tell her I'm an accountant. It turns out she is in network marketing. Although my newfound acquaintance has only been in the business for a couple of years, she is already making a substantial six-figure income - more money than she has ever made before.

She steers the conversation in the all-too-familiar direction, and starts peppering me with questions: "How can I save on taxes? Should I put my money in a trust? Take it off shore? Set up a pension plan? Can I write off my motorboat?"

Before answering these questions, I have a few of my own for her. "Are you keeping good records? Do you have an accountant or other tax professional helping you? Have you ever done a profit-and loss-statement so you know where you stand? Are you making sufficient estimated tax payments? Are you current with your yearly tax filings?"

          "Er," a long pause ensues. "Well, no..."

At this point, I sit back and give her a little room. My fellow passenger is a tax bomb, and I just heard the ticking.

It is my experience that many people are in a situation like this woman's; they are making a comfortable income and still leaving themselves vulnerable, if the IRS were to pay a visit. 

Could you be next?

Think of this article as the instructions for disarming a tax time-bomb, and making sure that even a full IRS audit would be a less painful experience.

Let me start with the Six Commandments for keeping the IRS off your back:

1. First, it will make it that much easier for your tax preparer to go through your records.
2. More importantly, it will allow you to defend yourself should the IRS come knocking on your door. I have seen, with my own two eyes, what happens in audit situations where clients' records are sparse or non-existent. It isn't a pretty sight.

Don't be the "new business enthusiast" who runs to the accountant to get the business set up then forgets completely about all record keeping. And the "shoebox" effect will NOT pass muster with either your tax accountant or the IRS!

Another possible reason for IRS correspondence may be that the IRS has some questions regarding a tax return you filed. Let me assure you from experience that ignoring this type of letter will not make the problem go away. Instead, the IRS will proceed without you, which could eventually require you to hire someone like me to fight the government in court, or in collection.

Everyone's tax situation is unique and here are a few hints:

1. Keep good records of all business expenses, substantiating their business purpose. Nine out of ten tax problems arise from the failure to take this simple, if occasionally tedious, precaution. The tax law specifically allows you to deduct necessary and ordinary business expenses incurred in carrying on a trade or business. Keep a daily record, diary, or planner with all your business expenses.
2. Use one, or at most two, credit cards exclusively for all your business purposes. This way, you know exactly where to look for all the business expenditures.
3. Do you travel overnight as part of your business? Of course you do. Do your clothes get dirty as a result? Then the cost of dry-cleaning them is entirely tax deductible.
4. Does your spouse work? If not. You should consider hiring her or him at minimum wage. Chances are, your spouse is doing plenty for your business already. Document it. Then setup an insured medical reimbursement plan for your employees (i.e., your spouse) and dependents (your kids), and deduct your contributions as a business expense. Note: if the plan is not funded by insurance, then other IRS rules apply.
5. Do you have children? Are they older then six or seven? Then put them to work! By which I mean, you should consider hiring them for minimum wage (perfectly legal in a family business). Their first $4,000 or so will be basically tax-free to the child because of the standard personal tax deduction - and totally deductible to you! A note here: make sure that your child is actually performing legitimate, business-related work you can document, if asked. Yes, stuffing envelopes does count.
6. Do you have more than one car?  Then try to use one solely for business purposes. This will take some self-discipline, but it will allow you get the most tax benefit from one business vehicle.
7. If possible, conduct sales seminars and presentations at home. In this way, the cost of all food and refreshments (even the leftovers!) will be totally tax deductible as a business expense.

Of course, you need to prove, if asked, that this was not just a social bash! I suggest videotaping all or part of the evening for posterity, or collecting people's business cards and filing them with your receipts.

Sound tax planning lets you keep more of your money - and your peace of mind.

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