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What's in Your Mailbox? Tips on What to Do When Uncle Sam Comes Knocking

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Every year, one in 10 of us receives the dreaded letter. You know the one -- and you probably don't want to open it: the IRS requesting more information about your finances. Most of us don't know what to do when we receive it; this article will lay out exactly what to do when you're in trouble with the Internal Revenue Service.

Each year, at least 140 million Americans report their income to the IRS via tax returns. And every year, at least 200 million receive a notice from the Internal Revenue Service.

Unfortunately, this is often only the first step in an ongoing negotiation with tax collectors. About one percent of Americans will get audited this year. These are individuals who owe back taxes, have misfiled their forms, or did not file altogether -- typically due to fear or lack of knowledge as to how to complete the process.

Many political theorists, pundits and elected officials agree that tax collection is culpable for many of our country's problems. On any given day, there are hundreds of opinions espoused on the topic. Just look at the recent headlines about the IRS delaying the opening of tax season -- it finally happened at the end of January. And proposed reforms have been a hot topic for both parties. States are finally pulling in more tax revenue with the new economic outlook bright.

It's undeniable that taxation is a hot topic and one, I would argue, that too often overlooks the burden our tax code imposes on Americans -- NOT because of the financial obligation, but merely the complexity of the process.

Hypothetically, if taxes were simple and easy to pay, and involved minimal paperwork and discussion, the rate of taxation would drop significantly. The government would also collect much more money, while also freeing up millions of hours of stress and anxiety and wasted careers of people who are experts in helping others dodge and minimize taxes.

But Who Are Most Impacted By These Issues?
The answer is simple: small businesses -- because these individuals are new or inexperienced to the legalities of taxation, and do not yet have enough funds to hire experts. Business decision-making is built around tax implications. Instead of focusing on satisfying customer needs and innovating, entrepreneurs act on ways to evade and decrease taxes -- distracting them from their purpose.

Here are a few tips on how to avoid or resolve contact with the IRS:

1. When you receive a notice from the IRS, don't panic. There are 200 million other people who are going or have gone through the same experience. Stay calm, but act quickly. Avoidance and procrastination can become tax evasion depending on some other factors.

2. Read about the tax code. Information is power; find out exactly what you have done, and thoroughly understand the penalties before you meet with a tax lawyer or an IRS representative.

3. Most communication with the IRS comes in the form of a letter. You must immediately go to a professional, such as a local tax advisor. Stay away from the larger tax firms, as they are not equipped to do the record keeping and bookkeeping necessary for a small sole proprietorship.

There are also companies dedicated to helping clients (individuals) resolve IRS problems: try this one.

Here are a few more resources:

4. Never assume representatives from the IRS are experts. Everyone makes mistakes, and it is possible that your file was wrongfully reviewed. Double and triple check -- with an expert -- everything analyzed by the Internal Revenue Service.

5. Document everything you do. In case of legal action, it will be in your benefit to save all email correspondence, to take notes on every conversation you may have with the IRS, and ensure you get it in writing.

6. Review your bill carefully with an accountant or tax lawyer. 137.98 million tax returns filed in 2009 that had a positive AGI. IRS notices are terribly designed and not intuitive. Many people end up sending in the wrong amount -- leading to further complications or repercussions.

7. Go see the IRS representative in person -- do not do it over the phone. You can negotiate penalties and interest if you do.

8. Always negotiate penalties and interests. The IRS imposes extremely high rates, and you can negotiate them. The Internal Revenue Service wants to close cases, as their revenue is generated from collecting -- use this as leverage.

9. Most importantly, you always tell the absolute truth including when you don't understand. It becomes a felony if you provide inaccurate information.

And in the future, to deter contact from the IRS:

10. Hire a professional bookkeeper. Approximately two-thirds of American voters said the federal income tax system is too complicated today and opt to have someone else prepare and file their taxes, a Quinnipiac survey found.

Whether you have a business or are keeping track of your own finances, you need a professional -- an expert who thoroughly understands tax law will not only keep you far from trouble, they will show you how to save money through tax policy.

11. Save your receipts -- all of them-- and document every aspect of your financials. You need tangible proof of your spending. You also need to file all activity regarding your financials. Documenting will make it easy. Receipts are pivotal. Avoid complications -- save them from the start.

12. Remember, "Tax avoidance is legal; tax evasion is criminal."
It is wise and savvy to study tax policy and work closely with an accountant to determine ways in which you may eliminate or at least reduce your tax liability. However, if you are not an expert, do not do this alone. There are many, many ways to unintentionally evade taxes, such as inaccurately claiming deductions or underreporting income, making errors in bookkeeping, committing fraud by missing a step in transferring assets or income, among many others.

Taxes are a difficult realm to navigate, but if I can make it through, so can you!

Special thanks to Lauren Bailey and Maya Horgan for assistance crafting this article.

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