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Tax audits don't have to mean large financial setbacks

When the IRS comes knocking and asking questions about your income and the returns you filed, you probably experience a myriad of emotions ranging from shock to anxiety and everything in between just like other Massachusetts residents in your position. One of your primary concerns could be that you will owe so much more in taxes that you will not recover financially. However, that does not have to be the case. Tax audits do not have to result in financial setbacks.

Even though you may feel as though the IRS is treating you like a criminal, the agency does understand that mistakes happen. If you are forthright and honest, you may not suffer serious consequences. The penalties assessment may not be quite as harsh as at first anticipated.

Foreign Account Reporting Compliance After the Close of the OVDP

About a decade ago, the IRS implemented an amnesty program that allowed taxpayers to pay back taxes, penalties and interests resulting from income earned through foreign accounts without fear of criminal persecution. In the decade that followed, about 56,000 Americans came forward to resolve more than $11 billion in tax revenue owed to the U.S. government.

This amnesty program, known as the Offshore Voluntary Disclosure Program, closed in September 2018. In its wake, there are several programs available to encourage taxpayers to voluntarily disclose offshore assets with minimal civil penalties:

Have you heard of he IRS's Information Returns Processing System?

Most Massachusetts taxpayers fill out their yearly tax forms, and they make sure they include every dollar of income in order to avoid any adverse repercussions for not doing so. Perhaps it's because they know, or at least suspect, that when it comes to collection taxes, the IRS has many tools at its disposal. One of those tools is the Information Returns Processing System.

This database looks at what a taxpayer reports as income against information received from employers and others such as credit card companies and other financial institutions. These companies are required to report any information they have about the income of clients or customers. If the IRS believes the numbers do not add up, first contact will be made by mail.

Tax evasion is not just about income taxes

When it comes to settling the bill with the IRS, the first thing that pops into most people's heads is personal and business income. While that is the case, the agency does collect other taxes as well. A Massachusetts small business owner who has employees needs to remember that the nation's taxing authority expects to receive the payroll taxes owed. If those are not paid, employers could find themselves facing charges of tax evasion.

For example, a man in a nearby state recently received a sentence of five years' probation for tax evasion because he failed to make the required payroll tax payments for two employees. Ironically, he owned a tax preparation business at the time. Between 2011 and 2014, the business owner should have submitted Employer's Quarterly Federal Tax Returns paying the Federal Insurance Contribution Act and income taxes for the two individuals each quarter.

Proving insolvency to the IRS could reduce the tax bill

Even though the country is no longer in the midst of a recession, some Massachusetts families still struggle financially. Many of them work out deals with their creditors to reduce their debt, and that may include having some balances forgiven, which means that the company that extended credit for a home, car or other debt absolves the consumer of responsibility for a portion of the debt. The problem is that the IRS usually considers this forgiven debt as income and that could mean a hefty bill at tax time.

Some Massachusetts families avoid having to pay taxes on debt forgiveness through a bankruptcy discharge. What happens to those families who choose not to file for bankruptcy? Are they simply stuck with the tax bill on those forgiven balances? Fortunately, bankruptcy is not the only way to avoid including those balances as income when it comes to paying taxes.

IRS issues: Getting tax withholding right can be a challenge

New laws often cause some measure of confusion in their first years. When the Tax Cuts and Jobs Act of 2017 went into effect, it was no exception. It created confusion for a lot of taxpayers, many here in Massachusetts included. Now, the IRS is advising taxpayers  to make sure their withholding is correct in order to avoid problems during tax time, but getting it right could present a challenge.

Adjusting the amount of taxes that an employer takes from an employee's paycheck helps control whether a taxpayer receives a refund or pays the IRS at tax time. It could also help adjust those numbers up or down. Moreover, changing withholding could affect how much individuals receive as income each pay period. Those wanting more income each month would increase the number of allowances claimed on their W-4 forms and decrease them to pay more taxes during the year to increase the potential for a large refund.

Filing an audit reconsideration request

Getting the IRS to change its decision regarding how much a particular Massachusetts resident owes in taxes is not an easy task. The taxpayer must provide compelling reasons for the agency to approve an audit reconsideration request. In order to even get such a request past the first layer of review, it must meet certain criteria.

For instance, the reason for the reconsideration must fall into one of four categories. If a Massachusetts resident did not attend the audit or did not receive IRS communications regarding the audit due to a move, the IRS may grant the request for reconsideration. The other reasons why a request may be granted is if the taxpayers disagrees with the assessment or has additional information not available to the IRS during the first audit.

The new withholding form released for comment by the IRS

Filling out a withholding form (the W-4) is the first step in paying taxes on income. The IRS recently released a new form it wants to use for withholding that complies with the changes of the Tax Cuts and Jobs Act. The public may comment on the new form through July 1.

When the Tax Cuts and Jobs Act went into effect, it eliminated certain exemptions and deductions that had a significant impact on many taxpayers, including those here in Massachusetts. Since the W-4 form determines the deductions employers take out of workers' pay, this form needs to account for these changes. The new form will require more specificity from taxpayers and should account for households in which a wage earner has more than one job.

Keep tax records in case the IRS makes contact

Once Massachusetts residents file their tax returns, they may immediately put them out of their minds. Who can blame them? No one wants to pay taxes, and any dealing with the IRS can cause anxiety. While it is possible to move on and forget about taxes until the following year, records should still be kept -- just in case.

Taxpayers here in Massachusetts and across the country may put taxes out of their minds after they file them, but the IRS may not. Depending on the circumstances, the agency could come back to you years after filing and ask questions, initiate an audit or claim you made an error. It would be in every taxpayer's best interests to retain the records and returns for each tax year for a number of years.

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