Know the Price You Paid

Since 2011 the IRS has required that brokers report investors’ “cost basis” on stocks, mutual funds, and other securities. If you sell something for more than you paid, that’s a taxable gain, and you owe taxes on the difference. (Losses are deductible.) If you sell an investment that you’ve owned since before 2011, Hagy suggests you tell the broker what you paid and ask that the cost basis be included on the 1099 form that lists your investment gains and losses. If it’s reported by the broker, she explains, it's less likely to be questioned by the taxman.

The Effects of Moonlighting

If you run your own business as a sole proprietor, do any freelance work (as your primary employment or just on the side), sell enough stuff on eBay, or even make a few bucks on a hobby, you need to file a Schedule C. On this form you’ll list all your expenses as well as your profits. The more expenses, the lower your reported profit, and therefore the lower your taxes. That incentive has proven a little too tempting for people like a hotdog vendor in Chicago who, according to a story on MarketWatch, reported that his “cost of goods sold” was 50% of his sales. That sounded a little steep to the IRS, and after an investigation revealed he hadn't reported all of his income, he paid a hefty fine and back taxes. If you need to file a Schedule C, assume your DIF score just went up.

Keep Your Cool

If, despite your best efforts to stay under the radar, you do hear from the IRS, don’t panic. Let your accountant handle everything—you're not required to meet with the IRS in person, and there’s little upside to doing so. If you’ve kept records and followed the rules, your accountant will be well armed. Hagy recalls an IRS agent who tried to force her client to attend the meeting. “I suspect the agent had just graduated from college within the past few months,” Hagy said. “She felt like she had a lot more power than she actually did.” In fact, the young auditor tried to bolster her demand by brandishing a law that actually required judicial intervention to force the taxpayer to attend a hearing. But no judge was involved. Not only did the client stay away, but “when the audit report finally came,” Hagy said, “the numbers were wrong. There were obvious mathematical errors.” The total tax owed? Not a dime.

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