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Maryland Tax Law Blog

Report urges IRS to improve detection of fraudulent EIN use

Businesses in Maryland obtain their employer identification numbers from the Internal Revenue Service. A report prepared by the Treasury Inspector General for Tax Administration criticized the tax agency for its vulnerability to EIN abuse by fraudulent filers that steal existing numbers or gain numbers for fake business entities.

The report described programming errors within the IRS system that granted more than 227,000 EINs to sole proprietors who had numbers already or were dead. A statement from the inspector general admonished the IRS to create a better screening process to reduce business identity theft.

Steps to take if you receive an audit notice from the IRS

Receiving notice of audit from the Internal Revenue Service is the kind of news that no one hopes to get. Even if you have nothing to hide, it is never convenient to make time for an audit and submit your finances to additional scrutiny.

Although the IRS recently scaled back the number of audits it performs, heigh-earning individuals still face significant risk. If you receive an audit notice, the way you respond to it may greatly impact the outcome and the penalties you may have to cover.

How to prepare for a tax audit

Maryland residents may be in the process of collecting information to complete their tax returns. Ideally, an individual will take as many deductions and credits as possible. However, it is also important to understand what happens if the IRS decides to audit a return. In an average year less than 1 percent of returns are selected for further scrutiny. In 2017, there were slightly more than 3,000 criminal cases according to an annual report from the Criminal Investigation Division.

Those who have their returns audited have the right to schedule an in-person interview if it isn't feasible to mail or fax records. In most cases, the IRS only needs information related to specific items on a return, and this may be done by mail in many cases. In the audit letter, the IRS specifies why it is taking place and what information a taxpayer needs to produce.

Reducing the odds of an IRS audit

The odds of a Maryland resident being audited are relatively low. According to the IRS, only .7 percent of returns were selected for review in 2015. However, there are steps that one could take to help further reduce the risk of coming under IRS scrutiny. It is important to note that there is no way to eliminate the risk of an audit as some returns are selected randomly for review.

As a general rule, the IRS is more likely to review returns that look unusual or contain math errors. Using a software program to calculate figures used on a return may work to reduce those types of mistakes. Taxpayers who feel that claiming a deduction will increase their audit risk should still take it if it's legitimate. However, they should be ready to prove that they were allowed to claim the deduction.

Internet sales tax debate headed to Supreme Court

Many small businesses in Maryland do business over the internet as well as in person, and the growth of largely online businesses has also led to concerns about state sales tax collection. In January 2018, the U.S. Supreme Court agreed that it would hear a case on whether states can collect sales taxes on internet sales from businesses that do not have a physical presence in the state.

The law that has governed internet sales tax collection to date has been one that was developed for mail order catalog companies in 1992. In that case, the Supreme Court ruled that states could not compel catalog corporations to collect and remit sales taxes, except for companies with a physical location in the state. However, now 36 states have joined a lawsuit filed by South Dakota seeking a reexamination of the issue.

Cutbacks at IRS, agency still promises vigorous investigations

Taxpayers in Maryland and around the country were informed recently that IRS investigation and enforcement activity regarding tax crimes took a hit during the first year of the Trump Administration due to cutbacks in funding to the federal revenue-collection agency. Prosecution of IRS tax cases after allegations of federal tax crimes including tax fraud and tax evasion dropped by hundreds of cases during 2017.

After the release of the IRS annual report, officials insisted that goals such as heightened enforcement of employment taxes would remain a priority despite the reduced amount of resources from the federal budget. The chief of the IRS Criminal Investigation Division, Douglas Fort, assured would-be targets of criminal tax evasion enforcement efforts that they should not relax despite the diminished capacity of the agency to participate in every investigation they would with full funding.

Traveling with tax debts? Maybe not, thanks to this new rule

If you have tax debts, you probably want to figure out how to get out of them at the least cost to you. If you don't address the debts, you could find yourself in trouble with the Internal Revenue Service.

In July, there was a report specifically aimed at passport holders with tax debts. These individuals need to make sure they get their taxes in good standing. Why? The IRS is starting to take note and enforce compliance.

Private tax debt collectors

Many people living in Maryland experience difficulty paying their federal taxes. While these individuals and couples may make good-faith efforts to work with the IRS, sometimes these efforts fail. The IRS is permitted to contract with private debt collection companies to pursue delinquent taxpayers.

This practice of using private collection agencies has come under criticism from some quarters. Many have noted that collection agencies don't have the same standards that the IRS does when it comes to determining whether a debtor has the ability to make payments. As a result, people who would have been given "hardship" status by the IRS are not receiving it from debt collectors.

How to protect against cyber tax scams

Maryland residents and small business owners may need to be especially wary of identity theft and other security issues during the tax filing season. This is because thieves may try to get a list of employee W-2 forms in an effort to get the information on it. Companies are urged to contact the IRS directly if they are the victim of a scam or believe that someone is trying to conduct a scam.

Employees should be directed to not reveal sensitive employee information unless the request is verified as authentic. In some cases, an individual may send an email posing as a manager within the company who needs a list of employee names and W-2 forms. Scammers may also attempt to walk into an HR office and ask for such information in person. However, it is possible that anyone within an organization could be vulnerable to such requests.

E-filing can carry risks of late tax payment

Taxpayers in Maryland are increasingly using e-filing technology to submit their tax returns to the Internal Revenue Service each year. Tax returns must be filed each year in a timely fashion in order to avoid potential penalties. In the past, this simply meant mailing off a paper return before the due date, and the famous "mailbox rule" applied to tax returns filed close to the deadline. Lines at U.S. post offices were a frequent sign as April 15 approached.

However, many taxpayers use online systems to electronically file tax returns, eliminating the use of mail and much of the utility of the mailbox rule. When a paper return is filed through the mail, it is not considered a late filing even if it contains errors that require correction and re-submission. The situation can be different for e-filed returns. While the mailbox rule does apply and a return is considered timely as long as it is transmitted in an authorized, processable manner, rejections can complicate e-filing.

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