Taxes are the kind of thing that tends to drive a business owner up a wall. With complex laws, strict enforcement agents, and constant changes, the tax code can easily trip up someone who spends most of their time focusing on creating a viable business. It’s important for you to maintain a sane approach to taxes, and our goal here is to help you do that.
Income taxes stem from the 16th Amendment, passed in 1913. Direct taxes on individuals had been forbidden previously, and over the past century the tax laws have steadily grown, along with the Internal Revenue Service designed to implement taxation policy. There are five major sources of tax law and interpretation in the United States:
• Internal Revenue Code, tax laws passed by Congress;
• Regulations, interpretations made by the Treasury Department;
• Revenue Rulings, which are specific interpretations made by the IRS;
• Revenue Procedures, which are specific policy statements the IRS makes; and
• Case Law, rulings made by federal courts about taxation issues.
It all works together to create a tangled web that applies to both individuals and corporations, enforced by the IRS and its agents. The web is constantly changing, with new developments in each of the five areas listed above. The complex code has created an industry for tax professionals, who must spend countless hours every year keeping current on the various tax laws, using that expertise to handle the process for the average citizen, who can’t possibly keep up.
Taxation is serious business, because the IRS and its agents are tasked with making sure that each entity pays the taxes it owes. You don’t want to get involved in a long, costly legal fight with the IRS. Although you shouldn’t just cave in in a situation where you have a strong case that would significantly benefit your business, you need to choose your battles carefully. As a government agency, the IRS has a lot more resources than you, and can turn a fight into a no-win situation.
How should you keep your head when it comes to taxes? Even though none of us will ever enjoy filling out our annual tax forms, you need to have a balanced approach. An extreme reaction to taxation can lead to you make mistakes that you’ll regret down the road. Here are ten tips to maintain a balanced, sane approach to taxes:
- Recognize your responsibility to pay your fair share of the government’s budget.
- Recognize the IRS’s right to collect the income tax.
- Stay away from tax evasion schemes. If someone offers you a tax kit that will supposedly exempt you from tax, or puts your money in some offshore bank you’ve never heard of, just say no.
- Identify and claim every deduction you’re legally entitled to, no more, no less.
- Learn about the IRS—the way it thinks, operates, and acts as it approaches its assigned task.
- Focus more on knowing how the IRS interprets the law; the interpretations in practice tend to be more important than the actual letter of the law.
- Learn how to report your income without providing excess data that increases the chance of an IRS audit.
- Even if you prepare your own tax return, find a trustworthy tax advisor; you can always get some help and guidance and benefit from a professional review of your return.
- Don’t be afraid of the IRS. There are some true stories of IRS abuses, but the IRS is usually reasonable when it’s dealing with taxpayers, and the Taxpayer Advocacy Program is an effective help for dealing with a large, complex system.
- Never, ever, ever intentionally fail to report your income or pay wages when you can’t remit the payroll tax.