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Maryland Tax Law Blog

How to reduce the odds of a tax audit

Maryland residents and Americans across the country have an average odds of 1 in 160 of having their tax returns audited. The number increases to 1 in 23 for those who make over $1 million a year. Those who make less than $200,000 have a lower than average chance of being audited. Regardless of how much a person makes, there are things that he or she can do to reduce the odds of further IRS scrutiny.

Those who file a Schedule C should be careful to document business expenses and differentiate between those and personal expenses. If a person donates assets or money to charity, those donations should also look reasonable. If a donation is worth more than $5,000, an appraisal is often required prior to making it. A receipt should be kept on file if a donation is valued at $250 or more.

Filing taxes for money in foreign banks

The United States Internal Revenue Service applies special tax reporting standards to assets held in foreign financial institutions. These tax reporting rules require some individuals with foreign assets to file a specific tax form.

Tax laws pertaining to foreign assets can be confusing, so here are a few points that Americans need to keep in mind.

The effects of declining IRS audit rates

Many taxpayers in Maryland are perpetually concerned about the potential of an IRS audit, even when they've taken care to file everything correctly. Statistics show that the overall audit rate of the tax agency is continuing to decline and that this decrease is especially notable for high-income individuals and businesses. Less than 1 percent of individual tax returns and those filed by business partnerships are likely to be audited.

Some wonder if people will be more likely to file inaccurate returns or evade taxes if the audit rate continues to decline. In general, when people purposefully file an inaccurate tax return, they either underreport their income or exaggerate their deductions. Most people find it difficult to underreport income because their employers or contracting agencies file necessary paperwork with the federal government. However, up to 63 percent of income may be underreported when all-cash transactions and other unrecorded payments are the methods of payment.

How to prepare for an IRS audit

Due to the recent tax reform legislation, companies in Maryland and throughout the country could face a greater IRS audit risk. Some businesses will have had a greater incentive to accelerate deductions in 2017 and defer income to 2018. This could be seen by the IRS as irregular activity. Furthermore, many companies have changed their accounting methods or altered their tax years in anticipation of a lower corporate tax rate and repatriation of earnings.

An effective way to prepare for an audit is to assume that one will occur. This allows an organization to develop the legal and factual basis for any information that it includes with a return. Taking time to analyze all documents that go along with a tax return can help a business develop a coherent narrative that is supported by facts. Ultimately, this will make it possible to present a strong case to the IRS regarding any tax position a company decides to take.

What to do after hearing from the IRS

When Maryland residents have their tax returns accepted by the IRS, it doesn't mean that there weren't any errors. In a given year, millions of people will receive a notice from the IRS, and mistakes could lead to an individual paying more to the government. However, it is worth noting that a notice is not the same thing as an audit despite the feelings it may stir in a taxpayer.

In 2016, there were 1 million audits conducted, which was a 30 percent drop from 2011. That compares to 5.1 million notices that were sent out, which were focused mostly on math errors or income that was not reported. The IRS may send out a notice or audit a tax return for up to three years after it was filed. Furthermore, notices can be received throughout the year.

Understanding the concept of choate

The word choate is one that Maryland residents might not be familiar with. If something is choate, it is considered to be justifiable against other claims. This concept generally comes into play when the IRS puts a lien on a person's property for failing to pay an assessed tax debt in a timely manner. However, it is possible that other entities may have already moved to place a lien.

A federal lien is considered to be choate on the date that the tax is assessed. A state or local lien must be choate prior to that date to have the first right of collecting should a property be sold or otherwise liquidated. Furthermore, the state or local lien must specify who holds it, the property the lien applies to and the amount of the lien. Otherwise, it cannot be enforced ahead of the federal lien.

Common tax mistakes that increase the risk of an audit

Most Maryland taxpayers dread the thought of getting audited by the Internal Revenue Service. While the risk of being audited is relatively low, experts say there are a few innocent errors that could increase a person's chance of landing in the audit pile.

For example, people who rush through their taxes are more likely to be audited. Waiting until the last minute could leave a taxpayer without important financial documents or force them to hurry through calculations. This could lead to an incorrect tax return and an audit. Therefore, taxpayers should be sure to give themselves ample time to correctly prepare their returns. Another quick way to get audited is by filing a tax return on paper. According to the IRS, 21 percent of paper returns contain errors while only 1 percent of electronic returns have mistakes.

When is it necessary to file Form 8938?

Obtaining and maintaining significant assets overseas is often an excellent component of any portfolio, but is not without its own set of complications and potential headaches. This is especially true when it comes time to file income taxes.

Some individuals may need to file Form 8938 as a part of the returns, in conjunction with other foreign bank account reporting (FBAR). This may include Form TD F 90-22.1, depending the specifics of the assets involved, but it is important to understand that these forms serve distinct purposes and do not replace each other.

3 approaches to resolving tax debts

Tax season does not always result in federal tax refunds for people in Maryland. A variety of reasons could cause someone to owe taxes at the end of the year and face challenges in coming up with the money for the Internal Revenue Service. According to the IRS, tax penalties hit roughly 10 million people every year. A tax bill cannot be ignored, but people sometimes have options for gaining more time to pay or negotiate a settlement.

For people who owe less than $50,000, a long-term payment plan could provide relief. The IRS will continue to apply interest and penalties to the balance, but installment payments grant people a method for meeting their obligations when they cannot raise the money within 120 days. The tax agency might also respond favorably to requests to delay payment from people who can show that paying the bill will impose serious financial hardship.

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