• Will my estate have to pay taxes after I die? 
• Can I challenge the IRS if I get audited and don't agree with the result? 
• I want to start my own small business. What do I have to do to keep out of trouble with the IRS? 
• How long should I worry if I haven't filed tax returns that I should have filed? 
• 10 Reasons to See an Attorney for Tax Help 
• Understanding Your Rights 
• Glossary of Business Taxations Terms 
• Questions and Answers about Self-Employment Taxes 
• Business Form & Taxation Pros & Cons 
• Things That May Trigger an "Inquiry" or an Audit and Delay Your Refund 
• Substantiating the Business Use of Your Vehicle 
• What Happens if You Don't Pay Your Taxes

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. But all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity.

What are the rates for federal estate taxes?

The rates are steep, starting at 37%. The maximum is 55% for property worth over $3 million. The maximum rate is scheduled to decline gradually to 45% in 2009. There will be no estate tax in 2010, if the current tax law (passed in 2001) is not amended.

Are there ways to avoid federal estate taxes?

Yes, although there are fewer ways than many people think, or hope, there are. Here are some of the most popular:

• Tax-free gifts.You can give up to $10,000 per calendar year per recipient without paying gift tax. You can also pay someone's tuition or medical bills, or give to a charity, without paying gift tax on the amount. This reduces the size of your estate and the eventual estate tax bill.
• An AB trust. Spouses leave their property in trust for their children, but give the surviving spouse the right to use it for life. This keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the spouse.
• A "QTIP" trust, which enables couples to postpone estate taxes until the second spouse dies.
  Charitable trusts, which involve making a sizable gift to a tax-exempt charity.
• Life insurance trusts, which let you take the value of life insurance proceeds out of your estate.

Can I challenge the IRS if I get audited and don't agree with the result?

You do not have to accept any audit report; y?can appeal it by sending a protest letter to the IRS within 30 days after receiving the audit report. If you request an appeals consideration, you will be granted a meeting with an appeals officer who is not part of the IRS division that performed your audit.

If your appeal fails, you can then file a petition in tax court. This is a fairly inexpensive and simple process, if the audit bill is for less than $50,000. If it's for more, you will most likely need the help of a tax attorney.

Generally, it pays to contest an audit report by appealing and going to court. About half the people who challenge their audit report are successful in partially lowering their tax bill.

What are my chances of getting through an audit without owing additional taxes?

Fewer than 25% of audit victims make a clean getaway. The IRS audits half as many taxpayers today as five years ago, but the take per audit has increased. The IRS, thanks to its sophisticated computer selection process, audits only those returns in which adjustments are almost a certainty. Realize the odds are against you and focus on limiting the damage from an audit.

I am being audited and the deadline for filing this year's return is fast approaching. Should I file?

Not if you can help it. The danger in filing is that the new return is fair game for the auditor, and she may get permission from her manager to expand the audit to include that return.

Instead of filing, file for an automatic extension until August 15. To do this, get IRS Form 4868, Application for Automatic Extension of Time, and send it to the IRS by April 15. But be sure to pay all taxes due on April 15. If the audit is still going on in August, request a second extension by filing IRS Form 2688, Application for Additional Extension of Time, by August 15. If the second extension is granted, you will have until October 15 to file your return.

If the audit is still alive on October 15, don't file until the audit is completed. As long as you have paid all the taxes due and have no fraudulent intent, you won't incur any penalties or interest for not meeting the deadline. If you owe additional money, send in your payment with a letter stating that the payment is to be applied to the unfiled tax year. The auditor can't make you file your return; if she asks you about it, simply say, "I am not yet ready to file."

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I want to start my own small business. What do I have to do to keep out of trouble with the IRS?

Start by learning a new set of "3 Rs": record keeping, record keeping, and (you guessed it) record keeping. IRS studies show that poor records -- not dishonesty - - cause most small business people to fail to comply with their tax reporting obligations and to lose at audits, with resulting fines and penalties.

Even if you hire someone to keep your records, you need to know how to supervise him or her -- because if your bookkeeper goofs up, you are responsible. Consider using a computer to keep your records if you aren't already in the electronic age.

Keep all receipts and canceled checks for business expenses, and keep them organized and in a safe place. Separate the documents by category, such as:

• auto expenses
• rent
• utilities
• advertising
• travel
• entertainment, and
• professional fees.

Put your documents into individual folders or envelopes. If you are ever audited (and small businesses are about three times more likely to be audited than individuals), the IRS is most likely to zero in on business deductions for car expenses and travel and entertainment expenses. Furthermore, the burden will be on you -- not the IRS -- to substantiate your deductions. If you're unsure how to get started or what documents you need to keep, consult a tax professional who is familiar with small business record keeping.

What is -- and isn't -- a tax-deductible business expense?

Just about any "ordinary, necessary, and reasonable" expense that helps you earn business income is deductible. What's ordinary and necessary? The IRS has defined this as anything that's "helpful and appropriate" for your business. For example, buying a computer, or even a sound system, for your office or store can be an "ordinary and necessary" business expense. Buying the same items for your family room cannot be a business expense, however.

A few things are specifically prohibited by law from being deducted even if the expenses are for the purpose of conducting business -- for instance, a bribe paid to a public official. Other deduction no-nos are traffic tickets, your home telephone line, and clothing you wear on the job, unless it is a required uniform.

If I use my car for business, how much of that expense can I write off?

You can calculate your vehicle deduction using the standard mileage method or the actual expense method. The standard mileage method is more commonly used because the record-keeping requirements are much simpler. Under this method, the IRS determines the amount you can deduct per mile. (For the tax year 2006, the rate is 44.5 cents per mile; from 1/1/05 to 8/31/05, the rate was 40.5 cents per mile; and from 9/1/05 to 12/31/05, the rate was 48.5 per mile.)

Under the actual expense method, you deduct the actual costs you incur each year to operate your car, plus depreciation you pay for gas and repairs (according to a tax code schedule). Your deductible costs include gas and oil, repairs and maintenance, license fees, insurance, tolls, and even car washing. If you use the car partly for personal use, you must multiply your actual expenses by your percentage of business use.

Most people use the standard mileage rate because they don't want to bother with a lot of record keeping. But this ease comes at a price -- you usually get a lower deduction using the standard mileage rate than you would with the actual expense method. You must use the standard mileage rate, however, if you claimed certain related deductions (such as under Section 179 of the IRC) in previous years.

To use either of these methods, you must keep track of how much you use your car for business. (And you'll need to produce your records if you are audited.) Keep a log showing the miles for each business use, always noting the purpose of trip.

You can also depreciate (write off) the cost of the vehicle over a number of years.

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How long should I worry if I haven't filed tax returns that I should have filed?

Probably six years. The government has six years from the date the nonfiled return was due to criminally charge you with failing to file. (There is no time limit, however, for assessing civil penalties for not filing. If you didn't file for 1958, you still have an obligation if you owed taxes for that year.) Not until you actually file a return does the normal audit time limit -- three years -- and collection time limit -- ten years -- start to run.

Don't overworry about a nonfiled return due more than six years ago if you haven't heard from the IRS. The IRS usually doesn't go after nonfilers after six years.

My state had an amnesty period for non-filers. Can I ever hope the IRS will have one?

Maybe -- the idea is frequently kicked around in Congress. But the IRS has always opposed tax amnesty legislation, which lets nonfilers come forward without being criminally prosecuted or civilly fined. The IRS's reasoning is that after the amnesty period expires, significant numbers of people won't file, expecting another amnesty. Based on the success of various states trying, the IRS may be wrong.

Do I have to let the IRS into my home?

No. An IRS employee may not enter your home without an express invitation from you or another rightful occupant. The only exception is if the IRS has a court order, which is very rare. A field auditor may ask to come in to verify your home office deduction, but you don't have to let him in. Of course, if you don't, he'll no doubt disallow the deduction. Your choice.

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10 Reasons to See an Attorney for Tax Help

Business taxation, unlike some other business issues, is an area where there really is almost no room for error. Additional taxes, interest, and penalties are just the tip of the iceberg for making tax-related mistakes. An audit can be a very expensive procedure. Organizing and compiling records before an audit, particularly when poor record keeping practices are involved, can be devastating. Being audited will never be a pleasurable experience, but if you know what the IRS requires you will sleep better and ensure the well being of your business.

1. Time. Learning about your various tax obligations and implementing the procedures and practices required to meet tax obligations is time consuming. Using your time on this function instead of promoting your business may not be the best use of your time. An attorney can get you up and running.
   
2. The Right Start. Tax obligations and record keeping are not things that you should attempt to learn on the job. You need to have a system in place on the day you start your business. New businesses usually have start-up costs, inventory costs (even if just things like letterhead and business cards), and at least one employee (it may be just you). The IRS and every other taxing body care a great deal about your business from day one. You must too!
   
3. Tax Year. Businesses have tax years. In some instances, you can designate the dates defining your tax year. However, in some cases, the government makes this decision for you. An attorney can help you choose the appropriate tax year.
   
4. Business Income. Business income may come in many forms. The IRS refers to "gross income" which includes goods, property, services, bartering, and income derived from sales. You must know what the IRS considers as "gross income." Failure to report something as "gross income" will lead to additional taxes, interest, and penalties. An attorney should be able to clarify your income reporting responsibilities.
   
5. State Taxes. Many businesses derive income from doing business outside of the state where they are located. It is as important to be aware of the tax obligations of conducting business outside of your home state, as it is to be aware of your in-state obligations. An attorney can guide you through this potentially confusing and complex area of taxation.
   
6. Employee Taxes. Even if you have no "employees," you may be required to meet the tax requirements for a self-employed individual, including quarterly estimated tax payments. Although a sole proprietor may not have to pay business taxes, he or she may have reporting or other tax responsibility. A sole proprietor is usually an employer and an employee. Consult an attorney if you are not sure of your responsibilities.
   
7. Form of Business. Different business entities have different tax obligations. An attorney can assist you in determining the most advantageous business form. Your personal economic situation may be a factor to be considered.
   
8. Business Deductions. One of the incentives for starting a business is the availability of business deductions to offset other income. However, to take advantage of the numerous business deductions you must know what they are and how to qualify for them. An attorney may be able to help you optimize your deductions.
   
9. Change, Change, and Change. Tax laws and regulations change frequently. You can count on amendments to the Tax Code every year. Throughout the year, the IRS and Treasury issue rulings, regulations, and other published guidance interpreting the Code. Tax attorney follow this guidance and know how it can impact a business.
   
10. Ignorance is No Excuse You do not want to be in a position of arguing that you deserve a break from the IRS because you did not know about a tax obligation or what was required to meet it. The odds of that argument succeeding are not good at all. An attorney will work to make sure you know what you need to do to satisfy your tax obligations.

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Understanding Your Rights

Believe it or not, you have rights in your dealings with the Internal Revenue Service. These rights include:

• IRS employees must explain your rights and respect them.
  
• IRS employees cannot disclose information about you to anyone, unless the law authorizes disclosure.
  
• When an IRS employee asks you for information, you have the right to know (1) why the employee wants the information, (2) how the information will be used, and (3) what will happen if you do not provide the information.
  
• If you believe an IRS employee has not treated you in a professional, fair, and courteous manner, you should tell that employee's supervisor. If the supervisor's response is unsatisfactory, you can write to the IRS Director in your area (look in your local telephone book) or to the center where you file your tax return.
  
• You may represent yourself or, with proper written authorization, have someone else represent you. Your representative must be a person allowed to practice before the IRS, such as an attorney, a CPA, or an enrolled agent.
  
• If you are in an interview and ask to consult your representative, the IRS must stop and reschedule the interview.
  
• You can have somebody with you at an interview.
  
• You can make sound recordings of any meetings with the IRS's examination, appeals, or collection personnel, provided you tell the IRS ten days before the meeting.
  
• You only have to pay as much as you owe. If you cannot pay everything that you owe when it is due, you may be able to make monthly installment payments. If you have paid too much, you are entitled to a refund, as long as you apply for one on time. Generally, the deadline for filing for a refund is three years after the date you filed your original return or two years from the date you paid the tax, whichever is later. Because the deadline could be different for unusual matters, it is usually best to get professional tax advice concerning IRS deadlines.
  
• If you disagree with the IRS about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. You may also ask a court to review your case.
  
• The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on incorrect advice. The IRS will waive any interest that is the result of certain errors or delays caused by an IRS employee.
  
• The IRS will generally owe you interest on your refund if it takes longer than forty-five days from the date you filed your refund claim or return to send you your refund check.
  
• The Taxpayer Advocate Service can help if you have tried unsuccessfully to resolve a problem with the IRS. Call toll-free 1-877-777-4778 (1-800-829-4059 for TTY/TDD).

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Glossary of Business Taxations Terms

Accounting methods:

Methods of accounting under which taxpayers regularly compute their income in keeping their books.

Accrual. Under the accrual method, income is reported as earned, and expenses are deducted when incurred.

Cash. Under the cash method, income is reported as received, and expenses are deducted when paid.

Employer identification number. A nine-digit number used to identify the tax account of employers, sole proprietors, corporations, partnerships, estates, certain trusts, and other entities. This number is required if you pay wages to one or more employees; you are a withholding agent who is required to withhold taxes on income other than wages paid to a nonresident alien; you file Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F; you file a Profit or Loss From Farming, or Form 1040, U.S. Individual Income Tax Return, and have a Keogh plan; or you are required to file employment, excise, alcohol, tobacco, or firearms tax returns. Apply for an EIN using Form SS-4.

Employment tax. Federal income tax withholding, Social Security tax, Medicare tax, and federal unemployment tax that an employer must submit on behalf of employees.

Excise tax. Tax paid if a business manufactures, sells, or uses certain products or tax imposed on a particular occupation or activity.

Information tax returns. A return filed by an entity to report some economic information other than tax liability - includes a return that reports the income or loss of an entity that is not subject to tax (e.g. partnerships).

Sales tax. State or local taxes on the retail sale of goods and services.

Self-employment tax. Social Security and Medicare tax paid on the net earnings of individuals who work for themselves.

Tax year. An annual accounting period for reporting income and keeping records. There are three types of tax years. A calendar year runs from January 1 until December 31. A fiscal year generally runs for twelve consecutive months ending on the last day of any month except December. A taxpayer who regularly computes income based on an annual period, which varies from 52 to 53 weeks, can elect a 52-53 week year. A 52-53 week year always ends on the same day of the week and always on whatever date the day last occurs in a calendar month or on whatever date the day falls which is nearest to the last day of the of a calendar month.

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Questions and Answers about Self-Employment Taxes

Q: Who is considered a self-employed individual?

A: Somebody who (i) engages in a business or trade to earn his or her livelihood or a profit, and (ii) has not created a corporation to do so. The term includes

• farmers
  
• independent contractors (including lawyer, construction contractors and subcontractors, many computer programmers)
  
• some members of the clergy and Christian Science practitioners, members of religious orders who have not taken a vow of poverty
  
• some members of fishing boat crews
  
• sole proprietorships
  
• some newspaper carriers; and
  
• some public officials.

Q: May I work full-time for somebody and still be self-employed?

A: Yes. Self-employment income may come from work you perform in addition to your regular job.

Q: What forms will I need?

A: Pick up these forms and instructions:

• Form 1040 (you can't use Forms 1040-EZ or 1040A)
• Schedule C-Profit or Loss from Business (Sole Proprietorship)
• Schedule C-EZ-Net Profit from Business (Sole Proprietorship)
• Schedule SE -Self-Employment Tax
• Form 8829-Expenses for Business Use of Your Home (if you perform the self-employment work at home)

Q: How do I pay my income taxes when I do not have an employer to withhold them?

A: You should estimate your taxes and put money aside to pay them. Get Form 1040-ES and its instructions for estimating payments. This will help you figure out how much you should set aside. There is even a worksheet inside the instructions to help you. However, this may be an excellent time to consult with a tax professional. Often, proper tax withholdings require some planning, and if you do not estimate properly, you may be liable for penalties.

Q: When do I pay estimated taxes?

A: Generally, you pay estimated taxes four times a year. The first payment due is due on April 15th. The following payments must be made on the first business day after the next June 15th, September 15th, and January 15th.

Q: I am self-employed and pay for my own health insurance. Have the deductions improved any from the 50% that has been allowed?

A: Yes. Beginning in 2003 and thereafter, self-employed individuals are allowed to deduct 100% of the amount paid for health insurance.

Q: Where do I deduct the health insurance?

A: You deduct it "above the line" before you calculate your adjusted gross income.

Q: Now that I am self-employed, I have been paying my estimated income taxes each quarter and I seem to be paying an awful lot! What is the deal?

A: When somebody else employs you, you have a certain amount of money deducted from your paycheck for Social Security tax and Medicare. (This may be referred to as FICA.) As an employee, you only pay one-half of the total employment tax. Your employer pays the other half. When you are self-employed, you are both the employer and the employee. So you have to pay both parts of that whole tax, but you can get deduct half of it when you calculate your adjusted gross income on your Form 1040.

Your future Social Security benefits will be based on how much you pay into the Social Security trust fund. To figure how much you get, the Social Security Administration keeps track of how much you contribute from the information on your Schedule SE each year.

Q: How are the different schedules used and in what circumstances?

A: Cast yourself once again as both an employer and an employee. As an employer, you have tax responsibilities as a creator of income; as an employee, you have the tax responsibilities of a person who works for a living. Thus, as your employer, the income you create is a profit (or a loss), and you are entitled, just like any other for-profit business, to take deductions authorized for businesses. Schedule C or Schedule C-EZ are used to report your profit (or loss) and your business expenses to determine that. The result of that determination is part of your income as a person who works for a living. That part is reported on the front side of your 1040, which is the form for individual income tax.

Schedule SE is where you figure out how much you have to pay in employment taxes.

Q: My spouse and I are both self-employed, but not in the same business. How do we report our income and expenses?

A: You both have to file your own Schedule SE. If you were employed, even for the same employer, you would each be paying one-half of the employment tax on you own earnings.

Q: Is there any way I can avoid the self-employment tax?

A: Yes, but your options are limited.

• You could get a job working for somebody else.
  
• You could join a religious order that requires you to take a vow of poverty.
  
• If you are a duly ordained minister or a Christian Science practitioner, you can apply for an exemption in which you state that you are opposed to public assistance because of your religious principles or your conscience.
  
• If you are a member of a religious sect that is conscientiously opposed to insurance.

Q: My little business really does not take in very much money. Do I have to go to all this trouble?

A: You might. You do not need to file Schedule SE if your net earnings are less than $400. Your net earnings are the money you collect when you sell your goods or services. They do not include your expenses.

Q: I read somewhere that𙭔er you have earned a certain amount of money during the taxable year, you do not owe any Social Security and Medicare taxes. Is that true for the self-employment tax, as well?

A: You will owe self-employment tax up until that point in the taxable year that you have earned $90,000 of self-employment income. When you earn more than that from your business, you will not owe any more Social Security tax until the next year, but you will still have to pay the Medicare tax. Form SE handles this situation by requiring you to pay 15.3 percent of your income in employment taxes, up to $90,000. If you earn more than that, you pay $13,770.00 plus 2.9 percent of your total income (this is the Medicare tax).

Q: How do I compute my deduction for the self-employment tax?

A: Use Schedule SE. You can deduct one-half of your self-employment tax in determining your adjusted gross income on Form 1040.

Q: Actually, I operate two small businesses. Do I file two Schedules for the self-employment tax?

A: No, the information about your earnings can be combined on one Schedule SE. However, you must prepare and file a separate Schedule C, C-EZ, or F for each of your businesses.

Q: What business expenses can I deduct, and where do I do it?

A: Use Schedule C or Schedule C-EZ. You can use Schedule C-EZ if your business expenses do not exceed $2,500. Keep track of (and records for) the following kinds of items (not everything is completely deductible, but keep track anyway so you can deduct the full amount you are entitled to).

• Advertising.
• Bad debts from sales or services.
• Car and truck expenses (keep track of your mileage!).
• Commissions and fees you pay to somebody else.
• Depreciation.
• "Section 179" expenses.
• Employee benefits programs, including a pension or profit-sharing plan.
• Insurance other than health insurance.
• Mortgage interest.
• Other interest.
• Legal services.
• Other professional services.
• Office expenses.
• Rent or lease of vehicles, machines, equipment.
• Rent or lease of other business property.
• Repairs and maintenance.
• Supplies other than the cost of goods sold.
• Taxes and licenses.
• Travel, meals, and entertainment.
• Utilities.
• Wages.
• Other expenses.

Q: Can I depreciate the computer I bought for my business?

A: A better approach may be to expense it to your business and use it as deduction. Depreciation is a rough measure of how much a piece of equipment loses value over time. In the case of a computer, as you know, the equipment ages very quickly. Perhaps you remember when the 486 chip was a big deal, or the first time you heard about a 56K modem and thought, WOW, that's FAST. When you depreciate, you get to deduct a percentage of the value of the equipment each year. However, with a computer, you can deduct the entire cost as an expense in the first year. This one-year deduction for a piece of equipment is called "expensing it," and it is permitted under Section 179 of the Internal Revenue Code. Therefore, this sort of deduction is called a Section 179 deduction. Get Form 4562 to claim the computer as an expense deduction. Note, however, that you may not be able to take the deduction or it may be limited under some circumstances, so you should probably talk to a tax professional.

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Business Form & Taxation Pros & Cons

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Things That May Trigger an "Inquiry" or an Audit and Delay Your Refund

• Your handwriting is illegible.
  
  
• Your social security number or your spouse's number is missing.
  
  
• Your social security number does not match the records kept by the IRS and Social Security Administration.
  
  
• Your dependents' social security numbers don't match the records kept by the IRS and Social Security Administration
  
  
• You have incorrectly stated the last name of a dependent.
  
  
• You have made math errors.
  
  
• You have made an error in transferring a number from a schedule to your 1040.
  
  
• You claimed too many personal exemptions.
  
  
• You took the standard deduction and somebody else claimed you as a dependent.
  
  
• You have taken the wrong number off the tax table.
  
  TIP: Use a pen to circle the row and column that applies to you. The place where they intersect will be circled, and that is the number to transfer.
  
  
• You did not sign your return.
  
  
• You did not include your daytime telephone number. (It is not required, but it may speed your refund if an IRS employee has a quick question for you).
  
  
• You paid somebody to prepare your return, which is deductible and that person did not sign your return.
  
  
• You did not attach your W-2s.
  
  
• You did not attach all the schedules and forms that you should have.
  
  
• You did not acknowledge all your income. (The IRS has ways of knowing)!
  
  
• You owe little or no tax due to excess deductions and credits that subjected you to alternative minimum tax, which you did not calculate and pay.
  
  
• You claimed a deduction for a home office. (The IRS pays particularly close attention to deductions involving a home office).
  
  
• You claimed substantial investment losses, especially partnership losses or "passive activity" losses. (Think Tax Shelter. Some work, some do not).
  
  
• You claimed a deduction for a swimming pool, hot tub, or health-club dues.
  
  
• You claimed a large deduction for medical expenses.
  
  
• You filed as a head of household and did not properly list your dependents, or have listed someone as a dependent who does not qualify.
  
  
• You underreported your tip income.
  
  
• You have claimed a large amount of business expenses.
  
  
• You have claimed large charitable contributions.
  
  
• You have claimed a deduction for giving a car to charity.
  
  TIP: The IRS wants to make sure that you donated a car out of generosity, because this is an easy way to claim a big deduction. You can only claim the fair-market value, and you had better be able to prove it. If the car is in good condition, have the car appraised and attach the appraisal report to your Form 8283. If you do not think it will fetch very much money, attach photographs showing its condition or attach a clipping of want ads stating the asking prices for the make and year of your car or similar models.

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Substantiating the Business Use of Your Vehicle

Deducting expenses associated with the business use of a vehicle can be a substantial tax advantage. However, to do so, you need to keep good records to substantiate the deductions. Whoever drives the car—from the owner of the business to the most-junior employee—must keep a daily log. There are also limited circumstances under which such record keeping is unnecessary. Below are some things to remember when keeping vehicle use records.

Good logs are essential to prove business use of a vehicle.

You can deduct business use of a vehicle under two schemes: deducting the percentage of business use of the actual costs of maintaining a vehicle, or deducting the cost (set by the Internal Revenue Service) of actual miles driven for business purposes. Under either scheme, logs are essential. A simple log should show the date, odometer reading at the beginning and end of the trip, the starting place and destination, reason for the trip, and the total miles traveled. Many commercial logs showing this information can be purchased. It is convenient to keep the log in the front seat of the car with an attached pen or pencil.

If you wish to deduct actual maintenance costs, you will also need to keep a log for all maintenance costs—depreciation, lease payments, gas, oil, tires, repairs, tune-ups, insurance, and registration fees. The receipts for these costs should also be retained, attached to either the log, or in a separate file coded to match log entries.

Under limited circumstances, you do not need to keep a log.

• If your business has a policy prohibiting personal use of the vehicle or a policy prohibiting personal use except in commuting, logs are not necessary. However, you must be able to show each of the following facts:

1. Your business owns or leases the vehicle, which is available to one or more employees for use in connection with your business.
   
2. The vehicle is kept on the business premises when not used in the business, unless it is temporarily in another location such as for maintenance.
   
3. Employees using the vehicle may not live at the business premises.
   
4. The business's written policy prohibits employees, and all persons whose use would be traceable to any employee, from operating the vehicle for personal purposes except for incidental de minimus personal use. De minimus personal use means that the vehicle's use for personal purposes is so small that it is negligible. For example, if the average distance driven each day is eighty miles, a two-mile divergence to stop for lunch is a de minimus use.
   
5. The business reasonably believes that neither any employee nor any person whose use would be traceable to an employee operates the vehicle for personal purposes except for de minimus use. However, the reasonable belief is best supported by keeping a log showing the breakdown of personal versus business miles. While the log would not have to be kept constantly, using it occasionally for representative periods, for example, one week every two months will provide good evidence in case your business is audited.

• The rules for vehicles not used for personal purposes other than commuting are similar:

1. Your business owns or leases the vehicle, which is available to one or more employees for use in connection with your business.
   
2. The business requires the employee to commute to work in the vehicle for bona fide non-compensatory business reasons. Some examples of bona fide business purposes are an inability to leave the vehicle at work because of threat of damage or theft, or a requirement that certain employee be on call.
   
3. The business's written policy prohibits employees, and all persons whose use would be traceable to any employee, from operating the vehicle for personal purposes except for commuting or incidental de minimus personal use. De minimus personal use means that the vehicle's use for personal purposes is so small that it is negligible. For example, if the average distance driven each day is eighty miles, a two-mile divergence to stop for lunch is a de minimus use.
   
4. The business reasonably believes that, except for de minimus personal use, neither any employee nor any person whose use would be traceable to an employee operates the vehicle for personal purposes other than commuting.
   
5. The employee required to use the vehicle for commuting is not a controlling employee. Controlling employees are board members or shareholders who are officers of the company, directors of the business, or anyone who owns at least one percent of the company's equity, capital, or profit interest.
   
6. The employer accounts for the commuting use by including in the employee's gross income the value of the transportation. The IRS publishes the value of a trip regardless of mileage.

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What Happens if You Don't Pay Your Taxes

People fail to file tax returns for a variety of reasons - personal or business problems, feelings of hopelessness or fear due to an extended period of non-filing, anti-government sentiments, or beliefs that the penalty will not outweigh the expense and trouble of filing. Because the United States tax system is based on taxpayers willingly honoring their obligations, the IRS does what it can to encourage non-filers to come forward voluntarily after a period of not paying taxes. Part of this strategy includes taking a voluntary disclosure into consideration when determining whether to criminally prosecute, negotiating payment installment plans, and reducing tax liability for certain needy individuals.

Whatever your reason for not filing, you may want to consider the following information:

• Knowingly failing to file a return can be a criminal violation of the law.
  
  
• The penalty for failing to file is 5% per month on the balance, up to 25%.
  
  
• No penalty is assessed if you do not owe any money.
  
  
• The penalty for filing a return but failing to pay is 0.5% per month on the balance, up to 25%.
  
  
• It is not the policy of the IRS to prosecute ordinary people who make simple mistakes or whose returns were lost in the mail.
  
  
• The IRS, although it reserves the right to do so, will probably not recommend prosecution for failing to pay your taxes so long as you voluntarily come forward before they contact you and arrange to pay what you owe.
  
  
• If you cooperate, you are less likely to be prosecuted.
  
  
• If you derive your income from illegal sources, it is more likely that the IRS will recommend prosecution.
  
  
• The more brazen your behavior has been, the more likely the IRS is to prosecute you. For example, the IRS would likely prosecute you for failing to file returns year after year, despite repeated contacts.
  
  
• If the IRS could show that you intentionally did not file your taxes, they can prosecute you criminally with a misdemeanor violation punishable by up to a year in prison and a fine of $25,000.
  
  
• In order to convict you of a tax crime, the IRS does not have to prove the exact amount you owe.
  
  
• The IRS has a general policy of not enforcing the filing of returns older than six years.
  
  
• The IRS can collect taxes, interest, and penalties for all of the taxes you have owed over the years. There is no statute of limitations on past due taxes.
  
  
• The IRS has programs in place to identify non-filers.
  
  
• The filing of a return starts the audit and collection time limits.
  
  
• If you do owe taxes, you can probably work out an installment plan to pay off your debt. Installment plans can last up to 10 years, although most average one and a half years.
  
  
• You may be able to negotiate a settlement with the IRS, depending on your ability to pay, that will significantly diminish your overall tax debt.
  
  
• The IRS may owe you money.
  
  
• Generally, a taxpayer only has three years from the time a return was filed or two years from the time the tax was paid, which ever is later, to collect a refund.
  
  
• If you go to a tax professional, you will probably not have to deal directly with the IRS.
  
  
• A tax professional should be able to obtain your past W-2s, 1099s, and 1098s from the IRS if you no longer have them.
  
  
• The IRS may accept reasonable estimates of charitable contributions, medical expenses, and other deductions.
  
  
• Depending on how complicated your situation and how good your record keeping is, the entire process of clearing up your non-filing status could take as little as a few weeks.

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The Tax Settlement Center is headquartered in Irvine, California. A majority of our clients reside in the Southern California areas of Irvine, Los Angeles, Riverside, San Bernardino, Long Beach, Torrance, Norwalk, San Diego, Oceanside, North San Diego County, Newport Beach, Laguna Beach, San Clemente, Santa Ana, Anaheim, Orange, Huntington Beach, Mission Viejo, Rancho Santa Margarita, Lake Forest, Foothill Ranch, Dana Point, San Juan Capistrano, Laguna Hills, Laguna Niguel, and all of Orange County.