Misconceptions and Audit Proofing Strategies (Part 1)
Reprinted with permission by Janine Golini. Al Aiello’s daughter, Janine Golini, has taken over the operation of his business. You may contact her at 3144 S Uber St Philadelphia Pa 19145 Tel: 215-688-3667
You know that fear. It’s the one that makes everyone paranoid around tax filing time. So many people let the FEAR of the IRS cause them to even overpay their taxes. The IRS’s biggest weapon is FEAR, but this should not stop you from taking a legally aggressive position to save more of your hard earned money from Uncle Sam. Tax expert, the late Al Aiello of www.AlAiello.com, was particularly passionate about this subject and here’s a review of some of his tips for those who fear the IRS and what to do about it.
Gray areas and being aggressive does not get you in trouble. Those previously convicted by the IRS got into hot water not because they exaggerated their charitable donations or took an aggressive position. It was because they committed serious FRAUD such as hiding millions in unreported income. Many areas of the tax law are gray. The gray areas are mainly with deductions. Therefore if you report all taxable income and you are legally & discreetly aggressive with your deductions, it is very unlikely you are going to get into any serious trouble with the IRS. With the IRS you do have rights! Your bill of rights is IRS Publication number 1, “Your Rights as a Taxpayer”
Eliminate FEAR of the IRS with a ‘Two Wall Defense’
You need two walls of defense: Audit Prevention and Automatic Pre-Audit Preparation. Audit Prevention (or audit proofing) will reduce or perhaps even eliminate your return from being selected for audit. In case you are audited, Automatic Pre-Audit Preparation is a back up wall of defense where you automatically have the documentation and tax law cites to support your tax-reduction strategies.
Reduce Your Chances of An Audit. The first rule of tax reduction planning is not to get audited! Here are some audit proofing techniques:
1. File extensions for all your tax returns. You can minimize your chances of being audited by filing as late as legally possible.
(a) Reasons why extensions reduce the chances of an audit – An individual tax return filed around April 15 generally has a greater chance of being audited then one filed on October 15 (the latest possible date).
(b) Other advantages – Stops you from “rushing” to get your return finished which in turn could cause you to overpay taxes or get sloppy with your return causing an audit. Haste makes waste! They also extend the time up to the following October 15th to make tax-deductible contributions to certain retirement plans.
(c) Extends time to file not pay, but well worth it – Understand that filing an extension does not postpone the payment of any taxes you owe. (Pay in at least 90%). This is not its purpose. The purpose of the extension is to reduce your chances of an audit, stop the mad rush and extend the time to make tax-deductible contributions to certain retirement plans.
(d) Forms and dates of extensions for individuals (1040) – For individual extensions, file IRS form 4868 for an automatic 6-month extension from April 15 to October 15. If you owe, pay at least 90% with an extension.
(e) Forms and dates of extensions for entities – The entities that follow file a separate automatic 5-month extension on IRS form 7004.
2. Avoid “E-File”! E-File is filing your tax return electronically right into the IRS computers. While this process may be easier and more convenient, it can be dangerous to your financial health. Instead, file your returns the “old fashioned” way – mail in the computerized paper forms. Reason: With the paper forms, the IRS has to go through more effort to get to them, such as opening the envelope, processing the forms, etc. Somewhere along the way the paper may get internally misplaced or even lost. (It happens!) Therefore, your paper return may never make it to any audit pile, even though it may have had audit potential. On the other hand, the E-File returns are right there, first come, first served, for a possible IRS inquiry or an audit.
3. Avoid Schedule C’s and E’s, file form 1065 (Partnership return). Being conservative about your taxes does not necessarily reduce your chances of an audit; on the other hand, being creative & aggressive does not necessarily increase your chances of an audit, if you know what to do. Just by knowing which tax forms to file (or not to file), you can substantially reduce your chances of an IRS audit.
Automatic Pre-Audit Preparation.
(a) In general. This is a system that will automatically prepare you for an audit in the unlikely event that one occurs (after using Audit Prevention). Using this 2 wall defense has important advantages.
1. Rest better. You will sleep much better, not worrying about the IRS (this alone is worth a lot!)
2. Good detail. You will develop good habits by being more attentive to detail
3. Eliminate fear! You will not be afraid to be more creative & aggressive in your strategies. This is in turn will save you even more taxes.
4. More control. You will have more control over your tax situation
5. Right direction. You will not be swayed in the wrong direction by inept or unconcerned advisors.
7. End result. You will pocket much more money, without fear of the IRS!
Here are some recent questions from my blog:
QUESTION: I am trying to decide what address should I use for my business checking account? Do I use my home address or a P.O Box?
ANSWER: Home address is fine since this is not a public domain. You don’t want to use your home address anywhere that has the potential to make your information public. And google maps, makes it a lot easier to locate you
QUESTION: I have a single-member LLC that owns a residential property. The property is my personal primary residence. If I sell my house in, say, 3 years, am I still eligible for the $250k exemption?
ANSWER: Yes, as long as you are living in it 2 out of 5 years preceding the sale date. Legal ownership is not as important as your residency status on the house.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at WealthBuildingPlan
