1 2 3 4 5 killed.
1 your entity
to minimize taxes it is essential to create a business entity; businesses spend billions to shape tax laws to their benefit. once this power is yours countless loopholes open and the rules become your tools.
business defined
for the agency's purpose being in business simply means having the intent to make a profit.
licenses, offices, employees, even revenues are not required. effectively the moment you had the intention to create a business you had one. and for tax purposes this was a magic moment indeed.
unlike wages, which are taxed directly, a business deducts the expenses incurred in the pursuit of it's earnings. if these expenses exceed revenues it is considered a "loss" and the owner of this business can apply this loss against her personal taxes.
the right business for you
absolutely anything can be a business. most good plans start with a dream and in order to get started here a daydream will suffice. you can always change your business concept to - absolutely anything else.
your business activity must have a reasonable expectation of eventual income (this could be dependent on future financing, technology, or any event - and may never happen). as long as you are seriously pursuing an eventual profit it's a business.
there are many reasons to select such a pursuit but for our purpose we shall focus on a single consideration: life integration. the more a business aligns with your life the more of your life's expenses that can be applied to the business.
say for example that you travel frequently. if you blog about your journeys and add an advertising network to your blog you now have a travel business. its deductible expenses are a share of your travel costs, your computer, your internet connection, your camera, etc.
you may enjoy cooking, working on your car, crafts, photography, sports - for almost anything you could be interested in it's a similar story. blog about it, run ads, and you are already in business. and all of your tools are business expenses.
even for more complex businesses things remain similar from a tax perspective. remember that is it's your pursuit that creates the tax reduction, not your outcome.
say for example you would like to open a hotel. in order to pursue your intentions you conduct research visiting hotels, looking at them online, and attending real estate investment seminars. all of these and related expenses are deductible even if your pursuit ends in withdrawal at a later date.
the business activity you chose is very flexible, the only rigid aspect of this is your intentions. you must be pursuing a profit (regardless of your success in this pursuit), otherwise you are a hobbyist and do not have a business entity.
there are no licensing requirements for your business but you will always do well to document your intentions. the easiest way to do this is with a website. here are a few helpful links for establishing a blog and attaching an advertising network for revenues:
blogs: wordpress  tumblr
advertising networks: google adwords
merchandise retail: weebly
graphic design retail: cafe press
once you know your entity you can get started. we recommend 3 sessions: one for steps 2 and 3, then one each for 4 and 5.
2 form 1040
the basic tax form. we start here to get a feel for what is owed.
3 schedule C
this is where you report your entity's business loss.
4 form 4562
The Guide takes you through this arcane but powerful form.
5 tie loose ends
linking the forms together and final completion.
write it off:
start with schedule c line 9
health care
1040 line 29
phone/internet bills
schedule c line 25
education costs
1040 line 49
child care
1040 line 48
energy efficient appliances
1040 line 52

how long will this take?

2 days to establish a busines entity

1 day to tally the expenses you want to apply

1 day of tax form completion using the line by line Guide

what are the risks of lowering my taxes?

the irs audits fewer than 1% of returns. the higher your income the greater the risk. the agency wishes to maximize the money it collects for its audit time. the lower the potential payoff for the agency the better your chances of avoiding audit

what data can the irs access by itself?

bank and brokerage accounts
u.s. based financial institutions report interests and dividends directly to the the irs using your name and social security number. foreign institutions may do this on request though such request would only come as the results of intensive investigation.
employers and clients
the irs requires employers and clients that pay you over $600 to report these amounts.
related party investigations
if the agency is investigating a party that has transacted with you it will be privy to the records of these transactions.

what exactly is an irs audit?

there are 3 types of audit

correspondence audits
75% of ll irs audits are by the mail. the irs requests that you mail information or documents instead of meeting with you.
office audits
this audit is announced by a form letter with either a pre-set appointment time or with the request for you to call the agency for an appointment. the letter often requests documents to bring such as receipts and canceled checks. the primary issues for an office audit are income, exemptions, theft and casualty losses, charitable deductions, employee business expenses, itemized deductions, previous audits, and other years’ tax returns.
field audits
though this is precisely what the agency likes people to fear it is a very rare occurrence due to its expense. the irs will attempt to conduct this audit at your premises and will produce a wide range of investigative questions and requests. scope is the primary weapon of a field audit; as a matter of course agents will attempt to bring previous years returns into questions

what increases my audit risk?

discrepancies between documents
eg: eg: w-2 and 1099, the irs employs a document-matching program, which compares the information sent to the irs by taxpayersŐ employers, clients, and financial services providers to whatŐs reported on the return. to avoid attracting the attention of irs auditors, make sure the numbers you report accurately match the information the irs receives.
mistakes, incorrect / missing information, using the wrong forms
math errors, incorrect social security numbers and other careless mistakes call attention to your return.
round numbers
although it seems more practical to just round numbers, too many round numbers on a return should be avoided.
too good to be true
if your taxes are disproportionately low this triggers reviews. this is ok but the more agressive your return appears the better the records you can present.

what strategies work for an irs audit?

correspondence audits
you should almost always cooperate with an audit by mail. unless the documents requested are lost or nonexistent, promptly send copies to prevent an escalation.
office audits
in most cases an audit delayed is an audit well played; in most cases the more time an audit drags on, the better the result. auditors are under pressure to close files, and need your cooperation to do it; time creates pressure. the drawback is that interest and penalties are growing—but this may be insignificant next to the damage caused by a large audit bill.

if you get a phone call from the irs before getting notice by mail, politely tell them you want notification in writing to make sure this a legitimate audit; refuse to discuss anything until you get a notice in the mail. always ask for the furthest date available so you have enough time to get your records in order; a month or two is common; the so called taxpayer bill of rights requires that you be given a say in this process. schedule the appointment on the last day of the week toward the end of the month, in late morning—just before the auditor’s lunch break—or late afternoon. friday afternoons are ideal, especially if a three-day weekend is coming up. then, call a day or two before and postpone the audit; you can get one, or possibly two, postponements for almost any reason.

on the day of the audit, leave some records at home, then ask for time to furnish them later. auditors have come to expect missing records and will routinely allow taxpayers two weeks or more to get them. at the audit you should expect to spend 1 - 4 hours with the agent, don’t offer anything voluntarily or try to be too helpful. if the auditor asks for something you don’t think pertains to the audit, ask them to explain specifically how it relates to the audit year; the IRS cannot require you to furnish data unless it is directly related to the year under audit.
unreported income is the auditor’s number one concern in a field audit. there are four common methods the agency uses to probe for income: net worth method: if your net worth has their calculations are wrong or that your net worth increased due to nontaxable factors.

expenditures method: the irs totals up all of your known and estimated expenditures for the year and compares the result with your reported income. if you spent more than you claim you earned, the irs will attribute the difference to unreported income. try to show that the irs didn’t add and subtract correctly or that money you spent was from nontaxable sources, such as loans, gifts, inheritances or prior accumulations.

bank deposit method: this is the agency's favorite indirect method of proving unreported income and is always used by field auditors. the irs simply tallies the deposits made in all of your bank accounts and compares the total with your reported income; if you have deposited more than you claim you earned, the agency will attribute the difference to unreported income. do your own bank deposit analysis before the audit, there can be any number of explanations when deposits exceed taxable income—loans, redeposits of bad checks, transfers between accounts, inheritances and gifts received, sales of assets, etc.

mark-up method: if you are in a retail or wholesale goods business, the agent may look at your sales, cost of goods sold, and net profits. if these numbers are much lower than for similar businesses, the irs will fill in the gap by asserting unreported income. ask the agent for the source of statistics, the irs may be comparing you to a completely different type of business. if this is not the case, explain why your business underperformed compared to similar businesses—it is a new business or was closed several months, your major customer or supplier went bankrupt, or any of a thousand other reasons.

avoid holding an audit at your home or business, the "bill of rights" permits small business owners to refuse an audit on their business premises if an audit would virtually shut the business down.

if the agency holds the audit at your place of business or home, don’t make it too comfortable. before agents arrive, remove any items that might cause suspicion; if a tour your of your business is required, don’t let the agent wander around on her own—stay by her side.

the tax code gives the auditor wide latitude and authority to pry into your financial affairs. the basic tools are the interview, summons, irs and other government files, and contacts with third parties. along with your audit notice may come a separate form called an "information document request", a written solicitation of records or other papers either in your possession or accessible to you. typically, bank statements and canceled checks are listed; if what is being requested may seriously hurt or even incriminate you, see a tax attorney before responding. if the agency doesn’t get information from you voluntarily it may issue a summons this orders you to appear before the auditor to answer questions and to bring certain documents. you can raise legal objections to a summons, including: self-incrimination, that the summons is vague, broad or unduly burdensome or that certain items are protected by a legal privilege—such as the attorney-client privilege. if you don’t comply, the irs may bring you before a federal court judge in a summons enforcement proceeding. During an office or field audit a few scenarios deserve special attention. What happens when: You don’t give the auditor information that she has requested. The Auditor has three choices: Drop it: You’d be surprised how many auditors back off or are forgetful. They are working on many other cases. If they have most of the information requested from you, they may let it slide. Go further without your cooperation and issue Third Party Summons: Auditors can call, write, or issue summonses to third parties such as banks, employers, business associates, and anyone else. You must be notified in writing when a third-party summons is issued and you have a right to object. But the bottom line is you can’t stop a third-party summons. Access IRS files: Your previous tax returns, audit reports, and tax account history can be accessed by auditors. The auditor might first ask you for this information. Seek other government and public records: Auditors have direct computer access to the Treasury Enforcement Communication Systems, or TECS, computer, which has all kinds of data on you. TECS is not public, so you can’t be sure what is in the files. The auditor can also access your Social Security Administration, passport office, and postal service records. Auditors can view local and state public records showing ownership of vehicles, boats, airplanes, real estate, and business entities you might be involved in. Private databases such as LexisNexis and credit reporting agency files contain a wealth of personal data about all of us, and are accessible to auditors. Make Third-party Contacts: Auditors can send letters or call or visit businesses and people who have dealt with you, such as the secretary of a church where you claimed a charitable contribution. First, they must give you Notice 1219A, Notice of Potential Third Party Contact. You can legally object to these contacts, at least in theory. If the auditor reveals personal or financial information about you to the third party, you can file a complaint with the IRS that your right to privacy has been violated by an unauthorized disclosure. Issue an examination report anyway: The auditor can issue the report based on the information she has and her estimates for the missing income or expense data. By far, this is the most likely consequence of your not cooperating with an auditor. You don’t show up. If you choose not to show up for the office or field visit, the IRS will take one of three actions: Conduct the audit without you:The IRS may also examine tax years not covered by the initial audit. The auditor may look at all open years—returns due and filed within the past three years. And if the auditor suspects serious misdeeds, he may go back as far as six years. Contact you again: You may be contacted by the auditor and asked why you are not cooperating. Eventually, she’ll give up and issue a report, finding unreported income or disallowing most of your deductions and exemptions. A tax bill will follow. Serve a summons and order you to appear. A summons is a legally enforceable order and you could be held in contempt of court—and even jailed—if you ignore it. See a tax attorney before making your next move. Should I talk to the Auditor during the audit? Auditors are trained to listen and to create silence. They examine records without speaking, with the hope that you will talk away. Auditors get damaging information from taxpayers who blurt out answers to questions that weren’t asked. The six best responses to a question posed by an auditor are: “Yes.” “No.” “I don’t recall.” “I’ll have to check on that.” “What specific items do you want to see?” “Why do you want that?” Again, don’t say more unless absolutely necessary. Also don’t lie to, or mislead an auditor, and don’t offer any favors to the Auditor. The Auditor tells me If you can’t prove a deduction in writing, it won’t be allowed. Courts have repeatedly told the IRS that taxpayers can’t be expected to keep flawless records. Tax regulations allow taxpayers, within limits, to offer oral explanations, use approximations for some expenses, claim expenses under $75 without receipts, and reconstruct records when the originals are missing. Gaps due to missing documents may be filled by reconstruction—a process by which you rebuild lost or destroyed records. Can I Negotiate With an Auditor? An auditor has no power to change your tax return. She can only propose tax changes to you. An auditor fully realizes that if you don’t go along with her proposals, you may appeal in most instances or go to tax court. In fact, the IRS’s guiding principle for auditors is to close examinations with your consent to keep you from clogging up the appeals office and tax court. Because an auditor’s performance is judged on her closing ratio —how many examination reports are accepted by taxpayers—you are in a perfect position to negotiate with an auditor. As soon as the audit begins, tell the auditor that you have heard that audits usually produce adjustments. Say that you would appreciate it if she finds them quickly and gets it over with so you can go about your business. Many auditors have a personal tax adjustment level, which they know will satisfy their manager. But the more time an Auditor spends on your case the more invested she’ll be in the results of her time. When the auditor completes her work, you will be handed or mailed IRS Form 4549, an Examination Report. It shows changes proposed to your tax liability for the years under audit. The report also provides a brief explanation for each change. You have three choices after you receive the examination report. Agree. The IRS hopes you will sign, date, and return a copy of the report along with IRS Form 870, Consent to Proposed Tax Adjustment. This is referred to by the IRS as an agreed case. By signing Form 870, you agree to the immediate assessment of the tax deficiency found, plus any penalties and interest listed on the examination report. You have up to three years to pay on a monthly basis. Interest and late payment penalties still accrue on the unpaid balance. Interest and penalties on late tax payments get added on. It is okay to tell the auditor that you will just wait until a bill comes from the IRS campus center computer and then decide how to pay. Argue. Examination reports are not cast in stone until you sign off. If you want to fight the report, call the auditor. Tell her what findings you disagree with. Ask what additional proof it would take to get her to change the report. Request 30 days to get a missing document or reconstruct a record. If your new documentation doesn’t help, ask the auditor for a copy of her work papers. These are the notes the IRS requires an auditor put in a file. Work papers should explain and justify any changes made to a tax return. Don’t be surprised if the auditor refuses to show you her work papers. If she refuses, tell her you know you are entitled to see them under the Freedom of Information Act, and if she won’t show them to you, you will make a formal request for them. Do nothing. You don’t have to respond to a proposed examination report at all. If you ignore it, the auditor may call, or in a month or two you will receive something called a 30-Day Letter. This is your formal notice that your case is considered “unagreed” and that you have 30 days to start an appeal or the findings become final. To contest the audit results now, you must file a petition in the U.S. Tax Court within 90 days. If you don’t, the examination report becomes final—your right to contest the audit without first making full payment has ended.

what if i don't pay the irs?

the agency will determine what it believes you owe as well as penalties and interest and send you a letter of assessment. after this 3 more letters will follow, cp-501, cp-503, cp-504, and finally lt11/l1058; each represent an escalation of threats to lien and subsequently levy.
tax liens
if the agency doesn't collect through these letters it files a lien. this can prevent you from financing or selling any property you own in the united states and as a public record makes it difficult to obtain credit.
tax levys
if the levy does not produce money for the agency and it can find salsable assets or bank accounts it will take them with the help of lethal arms. your assets will then be liquidated at auction. the agency may also garnish your wages - that is take the money your employer pays you.
this process is effectively under you control because 1 during every step the agency would almost always rather negotiate. 2 assets can be protected by changing their ownership or location 3 proof of financial hardship

what if the irs scares me?

in this case this will require some boldness on your part. and you could lose. once you accept these facts the rest is odds. unless you file a particularly aggressive return your chances of avoiding audit are much better than other financial risks such as investing in financial markets or real estate, even in their most conservative flavors.

ask a question of your own