audits Archives

Tax return records need to be kept on file for over 3 years

People in Maryland might have heard that they should keep copies of their federal tax returns for three years. This guideline represents a minimum recommendation that does not necessarily protect people from all inquiries from the Internal Revenue Service. Although the agency generally has three years to decide if it is going to audit a person or require additional tax payments, some situations extend the statute of limitations.

Common tax issues that raise chances of IRS audit

Although individuals in Maryland only face a low chance of getting audited by the Internal Revenue Service, not all tax returns are created equal. The IRS uses computers to analyze tax returns and flag some for closer review based on criteria meant to identify potential problems. Self-employed income, higher-than-average itemized deductions, rental properties and home office expenses all represent categories that could cause the agency to scrutinize people's tax filings.

Accountants, attorneys and audits

Maryland residents who have unresolved tax issues may benefit from using the services of both accountants and attorneys. The services that they offer complement each other. In many cases, both the client and the accountant benefit from working with an attorney.

Why taxpayers shouldn't worry about audits

While most Maryland residents may be nervous about an IRS audit, the chances of actually being audited are relatively low. Only 1 percent of those who make under $200,000 will have their returns examined. Of those who make more than $1 million, roughly 12 percent can expect to have their returns examined. It is also important to know that no single deduction is guaranteed to trigger an audit.

How new tax laws impact expense deductions

As a general rule, the IRS says that Maryland residents who have side gigs that lose money are engaging in hobbies as opposed to businesses. This means that they can't use that loss to offset any other income that they may have generated. In past years, individuals could deduct hobby expenses that were more that 2 percent of their adjusted gross income up to the amount of income the hobby generated.

Steps to take during a business tax audit

Maryland business owners may not like the thought of an IRS audit. In addition to the time needed to resolve the matter, a company could owe more money to the government. However, it is important to remain calm and polite throughout the process, and it is rarely a good idea to go into a meeting with the IRS alone. Instead, bringing in the company's accountant can be helpful in answering the government's questions.

IRS sends notices for many different reasons

For most Maryland residents, the idea of taxes becomes important once or twice each year, then it moves to the background again. Following filing though, a few people in the state can expect letters from the Internal Revenue Service. Getting a letter from the IRS is often a stress-inducing event, but it does not have to be. Indeed, on average, less than seven people out of a thousand will be audited. There are other reasons the IRS might contact a taxpayer after returns are filed.

Taxes and tip boxes

Taxpayers in Maryland who receive tips as compensation for their services should be aware of the Internal Revenue Service Chief Counsel Memorandum regarding cash payments issued from tip boxes. According to the IRS, the company in question had people on its premises to perform services. However, the individuals who performed the services were classified as volunteers by the company and were not paid by the company with benefits or compensation. Instead, the individuals were given cash payments from tip boxes that held payments given by customers.

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.

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.

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