LOOSE LIPS SINK SHIPS
For reasons that will become obvious as you read further, this article requires a dessert made from Fruit Loops, a cereal beloved by children of all ages and featuring a colorful, clever Parrot. But consider the possibility that the parrot is too clever, and too talkative!
Children of all ages will love these crispy Fruit Loop cupcakes:
Perils and Pitfalls of Pet Parrots
Once upon a time there was a business owner named Dave who had a clever talking parrot as a pet. The parrot was with Dave constantly, and the bird’s home was a very large cage right in the middle of Dave’s office.
The parrot observed all of Dave’s business meetings, and overheard all of Dave’s conversations with employees, bookkeepers, bank personnel, accountants, lawyers, and Dave’s ex-wife. As the official mascot of Dave’s business, the clever talking parrot presided over all important company transactions and decisions. In the evening the parrot remained in his splendid cage in the middle of Dave’s office and overheard the janitors and night personnel gossiping about Dave and his company. The bird knew too much.
Then one day the parrot escaped. Dave was very upset and put up Lost Parrot posters all over town with photos of his clever talking parrot. Dave offered a large reward for the recovery of his pet. He even put ads on local TV offering money for the recovery of the missing bird. But the clever talking parrot eluded capture.
It so happened that the local IRS office had a very large, magnificent bird feeder right in the middle of their very large garden. The IRS bird feeder was well-stocked with precisely the kind of tasty treats birds love. These tasty treats enticed and lured the clever talking parrot to visit the IRS bird feeder often.
One afternoon two IRS personnel on their lunch break observed Dave’s clever talking parrot while it feasted on the tasty treats:
First IRS Agent: What a nice bird! I’ve seen him out there every day for the past week.
Second IRS Agent: Yeah. He must have escaped from somebody.
First IRS Agent: Hey! I recognize this bird. I’ve seen posters all over town. It’s Dave’s parrot!
Second IRS Agent: You’re right. I’ve seen those posters too. And on TV. He escaped about
a week ago. Dave’s been looking for him.
After hearing his master’s name called several times the clever talking parrot is stimulated to speak. The parrot repeats what he has heard most often:
Clever Talking Parrot: Hide the money, hide the money!
First IRS Agent: Huh?
Clever Talking Parrot: Beat the IRS! Beat the IRS!
Second IRS Agent: Huh?
Clever Talking Parrot: Deduct the Parrot! Deduct the Parrot!
First IRS Agent: That’s outrageous!
Second IRS Agent: Let’s bring the bird in for questioning!
Several hours later Dave was delighted to receive a call from the local IRS office telling him they had recovered his clever talking parrot. His delight vanished immediately when he was then informed he was being audited and the IRS wanted to question him on a wide variety of matters.
Ten Useful Tips for Dealing With the IRS
(1) Use a CPA, Not Your Pet Parrot, to Talk to the IRS for You
The law allows taxpayers to use professional representation when dealing with the IRS. CPA’s with the requisite knowledge and experience are ideal for this purpose. An experienced CPA will ensure that if you are being audited your best interests will be protected. Similarly, defendants have a right to an attorney.
You should file Form 2848, Power of Attorney and Declaration of Representative, with the IRS to designate a representative to speak on your behalf and represent you:
(2) Be Honest
You will undermine yourself if you don’t inform your accountant of all relevant facts. If you want your CPA to be effective and help you when dealing with the IRS you must be honest with him or her.
Always remember that the government turned to the IRS to catch the 1930’s gangster Al Capone. The FBI tried for years to nail Capone, and failed. But numbers talk even when people don’t. Numbers live on even after people pass away (or are blown away.) And numbers don’t lie even when people do. Capone was nailed with paper, not guns. His vast and highly profitable business enterprises left a paper trail a mile wide and a mile deep.
Be honest with your CPA so he or she can help you in the best possible way.
(3) The IRS has a Job to do, but Don’t Let Them do a Job on You
All IRS personnel are expected to follow the Internal Revenue Manual (“IRM”), a guidebook of procedures and policies which is supposed to standardize the actions and decisions of IRS workers. The IRM is available to the public online:
The IRM is an extremely valuable resource which must be used whenever it is necessary to do business with the IRS. Referring to the IRM will provide valuable insight into how the IRS interprets situations and circumstances.
(4) IRS Penalties: Write a Letter, Not a Check
If you get a bill from the IRS demanding that you pay penalties stop and think! Don’t just write a check. Many IRS penalties can be abated through the “reasonable cause exception.” You may very well have a fighting chance to get rid of the penalty, or pay a reduced penalty.
Contact your accountant and ask him or her to write a letter to the IRS explaining your circumstances and requesting an abatement of the penalty. It’s worth a try.
(5) Give All Tax Documents to Your Accountant
One of the major causes of an IRS audit is the failure to report income the IRS knows about. Many categories of income are independently reported to the IRS including wages, interest, dividends, stock sales, prizes, and miscellaneous income like non-employee compensation shown on Form 1099-MISC.
It is essential that your give all your tax forms to your accountant so he or she can prepare an accurate tax return. Most tax documents must be sent to you by January 31st of the following year. By mid-February at the latest you should receive all of your tax documents.
Taxpayers with investment income and stock transactions receive Form 1099-DIV and 1099- B. Sometimes brokerage firms make mistakes and have to issue corrected tax documents. If you are an Eager Beaver and file your tax returns early and then receive a corrected tax document then you may need to file an amended return. If you don’t you may be hearing from the IRS.
(6) So You Owe the IRS
It’s not fun to owe the IRS. If you don’t pay them they can file liens which ruin your credit. Once the IRS has filed a lien they have ten years to collect from you. They can garnish your wages, levy bank accounts, seize and sell assets, and make your life miserable, even unbearable. The IRS has enormous powers most creditors don’t have.
If you owe the IRS find an experienced CPA and get professional help. There are many ways to deal with unpaid back taxes including affordable payment plans and an Offer In Compromise.
An Offer In Compromise (“OIC”) is a legal technique used to settle your unpaid back taxes for less than what you owe. Unfortunately there are many shady operators out there who will tell you that you can settle your IRS debt for “pennies on the dollar.” Sometimes this is true. Many times it is not.
Be skeptical of exaggerated claims made by possibly disreputable firms regarding OIC’s. And be wary of the very large fees charged by some firms for an OIC.
If you are being charged more than $1,000 for an OIC, shop around some more and make sure the accountant you are dealing with is licensed, reputable, and experienced.
(7) Tax Preparation Software Won’t Talk to the IRS for You
So you’re a cheapskate who thought you could save money by doing your own taxes. You deliberately bought and used cheap tax preparation software. But tax software can never replace experienced and trained human expertise. You did indeed save money for a while, until the botched and bungled tax returns you filed on your own are selected for audit. Now what?
Would you like to live in a world where accountants pretend to be plumbers? Where electricians pretend to be brain surgeons? Where third graders pretend to be airplane pilots? As I have written elsewhere, "Competence: the Crucial Cost That Can't Be Cut", there is no substitute for competence. Ever.
It’s wiser to use a CPA to prepare your taxes. The chance of being audited will be far less and you will have a knowledgeable, competent person to turn to for help if and when you need it.
There are two important numbers on every tax return. The first is obvious and is the tax you are charged for the year. The second number is invisible and is the chance your tax return will be audited. Good tax preparation will minimize BOTH the taxes you are charged and the risk of an audit.
If you use cheap tax software to do your taxes who will you call if you are audited? What door will you knock on for help? Good luck! You’ll need it.
Many CPA’s (myself included) offer sliding fee scales for tax preparation services where very simple returns are charged very reasonable fees. Many CPA’s view their role as one of service to the public as a whole and not merely a chance to make big bucks from everyone.
But in the final analysis the old saying is true: you get what you pay for. Competence costs money. Incompetence costs far more.
(8) What Does it Mean if the IRS Loves You?
Are you overpaying your taxes? Are you failing to take full advantage of all legitimate deductions? Are you fully utilizing all legitimate opportunities to pay the legal minimum tax?
The law requires only that you pay the legal minimum tax on time and that you truthfully disclose all items required to be disclosed. There is no duty of any kind to pay more than this or to do more.
For almost everyone money is hard to come by in this world, and easy to lose. Act accordingly.
(9) Failure to Keep Good Records
Some taxpayers fail to keep good records for their business and don’t keep important business receipts and other documentation.
But many crucial business records can be duplicated. Banks can provide copies of bank statements. And if your bank account is setup to retain and report images of all checks written it will be easy to get copies. This can be a lifesaver.
Receipts and statements can usually be obtained from recurring business vendors.
Thus, many important records can be duplicated as long as not too much time has gone by.
When it comes to missing receipts and records the last line of defense is the Cohan Rule, which legally permits the use of reasonable estimates when crucial business records are lost or otherwise unavailable.
Beware of Internal Revenue Code Section 61(a). The English translation of this law is clear: Everything is taxable income, everything, unless specifically exempted by another code section. To be allowed to say that a bank deposit is NOT taxable income you better have (or re-create) good records to show that the bank deposit is a non-taxable loan from you to your business, or some other category of non-taxable income. The burden of proof is on you. See:
(10) Is the IRS Killing You?
Sometimes actions taken by the IRS have extreme impacts on taxpayers. This can include extreme collection actions which deprive businesses of working capital such that they can’t meet payroll or pay bank loans. Such actions can wipe out a business. U.S. Supreme Court Chief Justice John Marshall famously observed that “The power to tax is the power to destroy.”
The law provides relief provisions and procedures to protect taxpayers from the harm caused by extreme actions of the IRS. The IRS has appeals procedures which can be used to mitigate extreme harm to taxpayers.
Beyond the IRS there is a watchdog unit called the Taxpayer Advocate Service the sole purpose of which is to oversee IRS actions and intervene whenever these actions cross the line and cause extreme harm to people.
Here again it is very important that you work with a competent and experienced accountant who is knowledgeable of these matters and who can protect you and your business.
What you don’t know can truly hurt you. You have to know how to ask for help in order to receive it. See:
Goodbye to Parrots
There are many good alternatives to pet parrots including dogs (I have one), cats, hamsters and even goldfish. No pet at all may be better than a clever taking parrot which escapes and is enticed to visit an IRS bird feeder.
Everything I’m saying here boils down to a few major points:
(1) The IRS is not your friend. Respect them but don’t fear them.
(2) Obey the law and you will never have anything to fear.
(3) Use qualified professionals to help you with taxes and representation before the IRS.
(4) Taxes are a cost of business and the price of civilization: Treat your tax obligations seriously,
just like a job.
(5) If you are in serious trouble with your taxes help is available. Don’t despair! Tax problems can be
fixed. Find and use a good accountant and listen to and act upon good advice.
No one likes to deal with taxes or the IRS. Do what you have to do on this subject so you can get on with your life.
And think twice about having a pet parrot!
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
450 South Main Street: The HQ of IQ
Brewer, Maine 04412-2339
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