“You must pay taxes, but there’s no law that says you gotta leave a tip,” declared a recent Morgan Staley advertisement.
I think we all feel like that: we are willing to pay taxes, but we don’t want to pay more than what we owe. This is especially critical for small business owners and freelancers. After all, what small business has extra money to overpay the taxman.
The question becomes “How can I pay my taxes, but not overpay?”
Our search for answers begins with The Fortune 500, where big companies have made paying the lowest possible tax an art form (and legally).
“Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.” – New York Times David Leonhardt, The Paradox of Corporate Taxes Feb 1, 2011
As you can see it’s no secret that paying the lowest possible amount of company tax can save you huge amounts of money while also staying fully within the laws of the U.S. tax code. Even though you don’t have an army of accountants and tax attorneys at your side right now, you can still build your own small business tax team.
Think of your tax team like a three-legged stool: bookkeeper, certified public accountant, and tax lawyer. That “stool” needs every leg in order to stand tall.
Your first line of defense will be your bookkeeper. Whether it is you, the freelancer or small business owner, your spouse, or an employee, that person must keep accurate books. They don’t have to know a lot about tax law, but they do have to know the different categories that expenses and income go into. That bookkeeper must make precise entries and keep receipts. If well-trained, a bookkeeper can even do the monthly, quarterly, and annual tax reports that must be filed with state and federal agencies. Today, there are some excellent bookkeeping software systems that make this possible, but everything still boils down to accurate data entry. The old adage, “garbage in/garbage out” really holds true in this instance. All of this information is the basis for what comes after it, and that can be trouble or bliss. It all is dependent upon the bookkeeper’s ability to do his job properly (note, most of my clients that owe large tax debts owe their IRS troubles to poor bookkeeping).
This information is passed on to the certified public accountant (CPA) at various times of the year. A CPA is more than an accountant or bookkeeper. They have met additional testing and education requirements after college graduation which uniquely qualify them to provide a wide range of accounting services. Few freelancers or small businesses, especially at start-up, have enough money in their coffers to have a CPA doing all of their accounting (data entry, reports, etc.). Most find it financially feasible to send the bookkeeper’s accounts to the CPA at the end of the year, have everything checked, and annual tax forms prepared from the data presented.
The third individual that all small businesses and freelancers should have onboard is a tax lawyer. A tax lawyer has a law degree, but in addition, they have specialized education in tax law. In many cases they employ CPA’s on their team or actually hold the CPA designation themselves, in addition to their legal credentials as I do. Taxes are extremely complicated today, and the tax code is well over 10 million words with over 2,000 different federal tax forms and multiple state forms.
“Did you know? The number of words in Atlas Shrugged is 645,000. The Bible has about 700,000 words. The number of words in the Federal Tax Code: 10,000,000”
The tax lawyer understands the complexity of our tax law and deals with more than tax filings. This is the person you consult for any IRS actions against you, as well as payroll tax problems. Also, he provides tax advice for business start-ups, estate planning, and more. This individual will represent you to the IRS as your tax lawyer, and of all of your team, this is the person who will confront the IRS on your behalf.
There has been some discussion as to why have a tax lawyer when you have a CPA. When dealing with the IRS, you want the experts on your side, and each one can provide you with different assistance. A CPA is trained in accounting, not law, so can be required to provide the IRS, any tax agencies, or tax court with all of the information about your case. Your tax lawyer can claim attorney-client privilege, and choose which information he wishes to divulge to the IRS. That doesn’t mean the CPA and lawyer won’t work together for you; what it means is that the tax lawyer is on the front line for you, and the CPA can provide support.
Another task where tax lawyers excel is negotiation. Most IRS issues (or even business issues, apart from tax problems) must have some negotiation to come to an acceptable conclusion. Lawyers, especially tax lawyers, have been trained to resolve conflict. CPAs, on the other hand, don’t usually have training in presenting a case or handling confrontation. The tax lawyer’s specialization in tax coupled with negotiation skills makes the tax lawyer a strong advocate on your behalf.
Although all three of these individuals are important for your success, the tax lawyer is the one person who understands the nuances of tax law, business and estate planning. This legal specialist is the one person who can gather complex information from the other two, then stand in front of the IRS defending you. While bookkeepers and CPAs are important for the accounting flows within a business, the tax lawyer can help you plan your future as well as represent you in any issues which may arise.