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Pizza parlors and tax audits: 3 ways to reduce the risk

As the year ends, many small business owners are doing more than just buying presents for family members. They are getting their paperwork in order to make sure their businesses are ready for the coming tax filings. While gathering this information, it can help to know some basic, proactive steps business owners can take to reduce the risk of a tax audit.

There are certain tips that cater to specific business types. As such, this piece will focus specifically on those who run a small restaurant business, like a pizza parlor.

If the IRS rejects a return, it could be due to identity theft

Technology has done so much to simplify life, but it also complicates it in many ways. The personal information of Massachusetts residents is out there for clever hackers to steal. When that information is stolen in order to defraud the IRS through tax-related identity theft, the only way individuals may know about it is when their income tax returns are rejected.

A Massachusetts resident may discover that someone else used his or her Social Security number to obtain a refund through a letter from the IRS indicating it received a suspicious tax return. Another way a taxpayer may find out is when his or her lawful income tax return is rejected because the agency says it is a duplicate. It would be easy to dismiss this as a mistake, but that would be the error.

Could the IRS penalize retirement distributions?

Many Massachusetts residents spend years building their retirement accounts. For those who did so through employment, the funds put into the account received tax-deferred status. That is, until withdrawn. Most people understand that the IRS could penalize them for withdrawing funds too early, but that may not be the only source of potential penalties.

Failing to make withdrawals by a certain age could incur a penalty as well. The IRS requires individuals to make their first required minimum distribution by the time they reach the age of 70 1/2. The first withdrawal must occur by April 1 after reaching that age. Thereafter, an individual must take a distribution each year by Dec. 31. If you continue working after reaching this age, you must begin the distributions in this manner the year after you retire.

The IRS doesn't accept the anti-tax arguments

Do those living in the United States, including Massachusetts residents, have to pay federal income taxes if owed? Do they even have to file federal income tax returns at all? Some people would say that the answer to these questions is no. They believe submitting those forms each year and paying taxes is voluntary, but -- and no surprise here -- the IRS does not agree.

According to the IRS, the term "voluntary" simply means that taxpayers have the opportunity to figure out their tax obligations themselves. Otherwise, the agency would do the assessment and tell taxpayers what they owe. Unfortunately, some individuals continue to believe that they do not have to file a tax return if they do not want to, and they could face expensive and serious penalties as a result.

Cryptocurrency owners may want to watch out for the IRS

Technological advances have made it a challenge for taxing authorities to pursue those they believe are hiding money in order to avoid paying taxes -- until recently, that is. The IRS has worked diligently to find ways to track people who own cryptocurrency in order to make sure they pay taxes on it. For this reason, some cryptocurrency owners, including some here in Massachusetts, could find themselves facing allegations of tax crimes.

The IRS tends to err on the side of caution when it comes to accepting and verifying an individual's income tax returns. Some Massachusetts residents are already far too familiar with this fact since they have already had  dealings with the agency in the form of audits or accusations of wrongdoing. In the recent past, the IRS has forged alliances with other countries in order to learn how cryptocurrency flows.

Does the IRS immediately file a tax lien when people can't pay?

Fortunately, the easy answer to that question is no. The IRS will not immediately file a tax lien against an individual who cannot pay his or her taxes. Boston residents who cannot financially meet this obligation may find a way to avoid such liens as the collection process proceeds.

The collection process begins rather simply. The IRS sends the taxpayer a bill. It is important to understand that this is the first step in collecting the debt the agency says an individual owes, so ignoring this first communication is not a viable option for avoiding the negative consequences of not being able to pay. Of course, this initial bill will demand payment in full of the amount owed, including interest and penalties. Persisting in not communicating with the agency will more than likely result in a tax lien for those individuals who own property.

Recent tax court litigation could affect many taxpayers

Many Massachusetts residents work outside the country. As such, they can take advantage of certain tax rules to save money, but it requires filing their personal income tax returns in a specific manner. However, without the proper assistance, it could be easy to make mistakes. The IRS may forgive certain inadvertent and/or immaterial errors, but recent tax court litigation could make it more of a challenge to make that claim.

In order to qualify for certain tax breaks while working outside the country, a Massachusetts resident must be a resident of the foreign country for at least 330 days, must earn income for personal services and have a home outside the U.S. Meeting these criteria may be the easy part of the process. Other qualifications include filing certain tax forms and involve either typing or handwriting a particular statement at the top of the personal income tax form.

Failing to consider the IRS in retirement could cost dearly

Most people who retire do so within a budget. Like numerous others across the country, many Massachusetts residents begin planning for their retirement as soon as they can, but that could be at different stages of their lives, so the budgets will be different. One mistake many people make when doing their planning is how the IRS will treat those precious funds.

Unless a Massachusetts resident has a Roth IRA, the IRS will take taxes out when he or she takes a distribution. Of course, the taxes are taken out upfront with a Roth IRA, but the benefit is that taxes do not come out when the individual needs the money as income -- during retirement. Any other kind of retirement plan requires payment of taxes upon withdrawal.

Will the IRS accept returns with certain tax breaks for 2019?

With all the changes to the Internal Revenue Code that took effect in the 2018 tax year, it may not surprise Boston residents that more changes could come for 2019. Not all tax breaks survive through to another year, and this year may be no exception. As the country enters the fourth quarter of the year, some people may already be looking to taking advantage of as many tax breaks as possible when they file their returns with the IRS.

Now would probably be a good time to find out whether certain temporary tax breaks will be available at tax time. The problem is that Congress still has plenty of time to either approve or disprove them, and that ordinarily does not happen until late in December or early January, depending on the circumstances. This does not leave a lot of time for the IRS to catch up in time to release the proper forms.

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