Two easy ways to avoid IRS problems

It’s wise to keep business and personal separate if you want to stay away from the IRS.

You could do things for two reasons, such as having a pleasant lunch with a business colleague, taking a vacation with your best client, or buying a vacation home that you also intend to invest in.

However, you are better off if you can separate your tax life into business and personal.

There are many large, messy, and expensive tax disputes that have resulted in violations of this fundamental divide. The person who forgets this rule and tries to turn personal matters into business ones calls for trouble. I think of people who:

  • Try to deduct the cost of their divorce because their business is in jeopardy.
  • Try to pull off a miserable vacation with her best client.
  • Claiming that their hobby as a gentleman farmer or horse breeder was really for profit.

Sure, there are many provisions in tax law that specifically recognize the dual purposes that many of us have in engaging in activities and purchases. Still, try to avoid such double targets and do your best to categorize things appropriately.

Keeping good records is another important rule that many people struggle with. In fact, most of us at some point violate this edict. You might think that keeping good records is just something that can help you when you actually get into a tax dispute.

But believe it or not, there is something about good record keeping that can save you from tax problems in the first place. Maybe it’s karma. Moreover, this rule applies not only to people who run companies.

For example, recreational players (even if they only play the slot machines) are required to keep a journal or other contemporaneous record of how much they wager and lose on each visit. That’s because your occasional big win is reported to the IRS by the casino. You can use game losses to offset your winnings. But if you don’t keep good records, you could end up losing twice – once at the tables and once to Uncle Sam.

Another example is charitable donations. Place a $20 check in the collection tray instead of a $20 bill. The law requires you to have paper evidence for every donation you withdraw.

Does the IRS really care about this type of record?

Yes. Most audits performed on ordinary, law-abiding individuals (ie wage earners with no undisclosed offshore accounts) are so-called correspondence audits.

Such audits – and you could be selected for one if you deduct a lot of contributions – taxpayers are told their deductions will be denied unless they promptly return supporting documentation. Two easy ways to avoid IRS problems

Fry Electronics Team

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