The answer to just about every individual or business tax question is “it depends”.
This is true for the basic questions “is it taxable?” and “is it deductible” (see my 2007 post “It Depends”) to more involved questions like “can I claim him/her as a dependent?”, “should I file joint or separately”, “should I expense or depreciate”, “should I incorporate”, “should I buy or lease”, and so on.
There are really no definitive answers that apply to all taxpayers in all cases. The correct answer depends on the individual “facts and circumstances” of the specific situation. This is why, as Albert Einstein said, “The hardest thing in the world to understand is the income tax”. It is also what makes taxes interesting and intriguing to those of us who choose to prepare them for a living.
There are, however, some “musts” when it comes to taxes – things that you simply MUST do when it comes to your income tax return.
The obvious first MUST - you MUST not “cheat”. You MUST report all taxable income from all sources and you MUST claim only legitimate deductions that are allowed in the Tax Code and that you have actually incurred and paid. This does not mean that you cannot interpret the Tax Code in your favor, or plan activities or transactions in a way that makes them deductible (see my guest post “How to Enjoy a Tax Free Vacation” at BARGAINEERING).
Here are some more MUSTS -
• You MUST keep good, contemporaneous records of all your income and deductions in the manner prescribed by the IRS and the Tax Code. This is especially important if you are self-employed, as the IRS will be paying special attention to Schedule Cs in the future as part of its “war” on the Tax Gap. Special recordkeeping requirements exist for such deductions as charitable contributions, charitable, medical, and business mileage, business meals and entertainment, business use of “listed property” (see my 2008 post “Listed Property”).
• If you have a one-person business, whether a corporation, an LLC, or a just plain Schedule C sole proprietorship you MUST keep your business life and personal life separate, and you MUST run your entrepreneurial activity in a “business-like” manner. This means having a separate checking account for your business (see my post "You Do Need a Business Checking Account").
• If you are required so to do based on your level of income, you MUST file an income tax return, or an automatic extension form, by the statutory due date (usually April 15th), even if you cannot pay all or any of the tax due. And if you have requested an extension you MUST be sure to get your tax return in the mail by the final deadline (usually October 15th), again even if you cannot pay all or any of the tax due. As I have pointed out many times in the past, the penalty for paying late is .5% (1/2 of 1%) of the tax due per month while the penalty for filing late is a full 5% of the tax due per month – 10 times more! And not filing a tax return at all can have serious consequences down the road (see my post “What Happens If You Do Not File Your Federal Income Tax Return”).
• You MUST not ignore correspondence or balance due notices from the IRS or a state tax authority. Even though more often than not a balance due notice from “Sam” or any of your other “uncles” or “aunts” is wrong you MUST respond (See my post “Oh No – A Letter From The IRS”). When you get a letter or notice from “Sam” or a state agency send it to your tax professional immediately!
Another must – your MUST become a regular visitor to my blog THE WANDERING TAX PRO to keep up-to-date on federal income taxes!