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The 3 most important tax rules

If you follow those rules, you're likely to stay out of tax trouble. Hint: Keep an eye on the paper.

By MSN Money Partner Mar 6, 2012 11:13AM
This post is by Robert W. Wood at Forbes.com.

 

Taxes are complicated, but some rules are simple. Respect these three rules, and you’ll reduce the chance of coming to grief with the Internal Revenue Service.

 

1. Keep business and personal affairs separate

 

You’ll be better off if you can separate your tax life into business and personal. 

 

I’ve seen many tax disputes in my 30-year career as a tax lawyer that came down to a violation of this fundamental divide. Trying to morph personal into business is asking for trouble, including:

  • Deducting the cost of a divorce because your business is at risk.
  • Deducting a miserable vacation with a best client.
  • Claiming a hobby was really for profit.

You may do things with a dual motive, like having a pleasant lunch with a business colleague, going on vacation with your best client or buying a vacation home you also intend as an investment. Still, your tax life will be easier if you try to avoid dual-purpose goals. (Post continues below video.)

2. Keep good records

 

You might think keeping good records is something that can help you only if you actually end up in a tax controversy. Yet keeping good records can keep you out of tax trouble in the first place.

 

For example, recreational gamblers should keep a diary of how much they bet and lose on each visit. You can use gambling losses to offset your winnings (casinos report these to the IRS). Another example is charitable donations. The law requires you to have proof of every donation you deduct.

 

Does the IRS really care about record keeping? Yes. Most audits are correspondence audits. You may be told your deductions will be disallowed unless you mail back records substantiating them.

 

3. Respect and keep those 1099s

 

How you handle third-party "information returns," such as Forms 1099, year-round will influence how hard a time you have when you file your return and interact with the IRS thereafter. Whether you are payee or payer, you need a system to record and track these information returns. That’s exactly what the IRS does.

 

A lot of what goes on at the IRS is computer matching -- the endless correlation of taxpayer identification numbers and payments. Even a small mismatch between what’s on these forms and what you report on your tax return will be caught and could result in months of hassles with the IRS. Much of what the IRS does, when it comes to monitoring taxpayers, is information return matching.

 

There are different forms for miscellaneous income. When you get your 1099s, don’t just stick them in a drawer. Look at them. Payers are required to mail all 1099s to payees no later than Jan. 31. Then, the payer has an additional month (until the end of February) to send all of its 1099s to the IRS. This one month lag means that if you receive a 1099 you know is wrong, there may be time to correct it before the IRS receives a copy.

 

If you receive an incorrect 1099 (and this is common), contact the payer who issued the erroneous form as soon as you receive it. Explain the error and ask whether a copy of the 1099 has already been sent to the IRS. If the payer has already sent a copy of the erroneous form to the IRS, you can still ask for a correction. In that event, the payer should issue a corrected 1099 (there’s a special box for this).

 

More from Forbes.com and MSN Money:

 

 

VIDEO ON MSN MONEY

10Comments
Mar 25, 2012 3:01PM
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The way to avoid tax trouble would be for the government to reform this archaic system to begin with.  It should have been designed in a way that the temptation of getting in trouble didn't exist.
Apr 11, 2012 1:10AM
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And the most important tax rule is to read Publication 17. Another tax rule is open your mail labeled important tax documents, instead of having your preparer do it. Also, leave the young kids at home when visiting your tax pro.

Apr 11, 2012 12:04PM
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a word for the Obama basher who would blame Barack if the sun did not shine brightly tomorrow morn and perhaps spoil his day  ...

Every time the GOP says that the George W. Bush tax cuts created jobs, an angel whispers "... in Asia."  good day Sir,,,

Apr 11, 2012 2:27PM
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It seems to me that if the Government can tell when you don't pay enough tax they can figure out exactly how much needs to be withheld and design a tax system that does that for you.  Why do we spend millions of dollars of taxpayer money to support an antiquated tax system.  We wouldn't need to pay as much tax if we weren't paying for the tax system itself and the tax preparers that go with it!!  When it comes right down to it there ain't much free about this country is there?
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Yes. The way to avoid tax trouble would be for the government to reform this archaic system to begin with.  It should have been designed in a way that the temptation of getting in trouble didn't exist.
Apr 17, 2012 10:26PM
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Paying my fair share of taxes doesn't bother me. It's the waste the federal government has. Our politicians have created a system so complicated and unfair to most of us. November 2012 has to be a game changing election for the good of our country. The ones serving right now have to go or we can only expect more of the same ole business as usual and good ole boy networking. Pork barrel spending has to be the first to go, this tic for tac spending is out of control like the rest of the budget. So vote them out, so we can try a new batch of politicians. We have to change the tax laws and get our spending under control or we will be in the same boat as Greece.
Apr 12, 2012 8:22PM
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You can blame the president and tax preparers.  It is not us who does you wrong, it is you who does you wrong.  Why should you blame others?  AND By the way not all tax preparers get paid.  Some volunteer their time to help people.  I volunteered to do income taxes for the people of this country.   What did you do for your country? 
Apr 17, 2012 7:02AM
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Wow.  Even with computers, calculating a Federal and California tax return is painful, time consuming and downright difficult, and I used to be a CPA.  As a shrinking small business owner, all I can say is thank goodness for the earned income credit.  Without it, I'd be complete toast.  "Load sixteen tons, what do ya get? Another year older and deeper in debt. . ."  The government is the last creditor I can get at this point.
Apr 11, 2012 3:48PM
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one! Vote out OBOMBO the socialist 2012! I don't agree or disagree with this tip.

tax tip two! Vote out liberal democrats 2012! I don't agree or disagree with this tip.

 

tax tip three! Vote NO on all new taxes and cut all taxes and

get rid of welfare liberal programs and benefits for all of washington

government workers and politicans! let them pay their own healthcare

and retirement like the rest of us! make it a part time job!

     But on this tax tip I agree 100%. The politicians are a bunch of crooks and they get free rides and so many perks that we don't even know about. How does a person making $174,000.00 a year become a multi millionaire or if they were already millionaires going into office double and triple their net worth. 2 term limitations are a must and I am voting every single incumbant out office come November!! Politicians cave into big money and special interests and we as average American citizens don't stand a chance. This includes state, county and federal governments.

 

Mar 25, 2012 3:08PM
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How do you stay out of state tax troubles?  They wait until the last month before the time limit expires wanting to know where your 2008 tax return is.  I filed 2008 ferderal and paid the taxes but did not owe state any tax.   Why , easy state tax subtractions that are not state taxable but federal taxable.  Seems like the states are looking for tax deadbeats without figuring out first if you owe them taxes.  Both Turbo Tax and Tax Act said I owed no state tax for 2008 but the state claims I do but no amount is given,  Both tax programs charge for state returns but federal is free for printing or e-file.  My return is quite simple, a 1040A federal return.  I assume the state gets the same 1099s as I do and the IRS does, plus a copy of my 1040A from the IRS.   Now i wonder why the state has a deficit with all the tax collecter works sending out papers to people that do not owe them taxes?  Great place to cut back expenses and have the state employees get a real job.  This was not even close, I owed the state about a minus $2,500 before my income is taxable.  About 3 numbers is all it took to figure this out.   Glad i have a BS degree in accounting.

 

The state is MINNESOTA!!

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