As anyone will tell you, the tax law gets into everything. Regardless of our practice, eventually there will be tax consequences for the work we do for our clients.
Today I’m going to share what I believe to be the two most important tax related concepts for your clients regardless of their situation or what they do. Fortunately, these rules are not technical. Unfortunately, they are often ignored.
Those two rules are: (1) Open letters from the tax authorities; and (2) Keep good records.
Open your mail
Too often, clients will receive correspondence from the Internal Revenue Service or Department of Revenue and simply ignore it. Regardless of whether your client owns and operates a business or simply files a Form 1040 to report wage income, all clients have the same feeling when they receive a letter from tax authorities: Fear.
We have all heard stories about the awesome power of the tax authorities and the tools they use to collect unpaid taxes. As a result, the letters often go unopened and are set aside.
But this is the worst thing that a client can do.
A number of years ago (when I still did my own tax returns by hand), I experienced that fear myself. I opened my mailbox, saw a letter and froze. Perhaps my fear was more acute because I considered everything that the letter could be. However, I opted to follow my own advice and open the letter. Luckily for me I had made a calculation error and I was due another $10 in my refund.
However, usually these letters aren’t about a refund. Most often, clients learn that they are being audited or that the government is threatening forced collection action. For this reason these letters should be read in their entirety. Only then will clients be able to explain to you their situation.
The consequences of failing to open or read correspondence from the tax authorities can only be negative. Often a taxpayer has a limited amount of time in which to act in connection with a notice. If that opportunity is missed, it can result in the loss of appeal rights and potential challenges to the government’s assertions. So tell your clients that the sooner the letters are opened, the more opportunities they will have to resolve their issues. Even though reading these letters sounds like common sense, I would not be writing this if people actually did so.
Maintain your records
As tax issues are likely implicated by the work you are doing for your client, the second most important rule is that your client should keep detailed records.
If your client operates a small business and keeps detailed records, it will help any audit go more smoothly and likely reduce the amount of any adjustment made by the tax authorities. If your client is in the midst of a divorce, having a handle on any outstanding tax issues can be essential to concluding the divorce and not having to deal with lingering tax issues for years to come.
If your client is the subject of tax liens and looking to sell or acquire a new property, detailed records will assist in obtaining a release or subordination of those liens. And if your client is looking to sell a business, clean tax records of filing and payment will minimize the amount of purchase price that must be escrowed pending confirmation that certain taxes have been satisfied.
Adequate recordkeeping is so uncommon that the IRS regularly produces publications and electronic updates reminding taxpayers of the value of good records. Quite simply, good records work to the benefit of both the client and the tax authorities.
As mentioned, these two bits of information are the most important tax advice for any and all clients. While intelligent tax planning can avoid problems and established procedures can be used to resolve problems that exist, prompt action in response to a notice and good recordkeeping are the best mechanisms for resolving a tax problem and achieving the best results.
Robert Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Departments of Revenue. Rob can be reached at 414/270-2538 or firstname.lastname@example.org.