Danbury Tax Law Blog

Do these things on your taxes, and you may be audited

The Internal Revenue Service's audit department is busy, but it is not because most taxpayers' returns contain questionable information. Less than 1% of the population is audited every year, which is a far lower number than it used to be. IRS staffing and funding are simply lacking, leaving fewer agents to review and investigate suspicious tax returns. Knowing this may make some Connecticut residents feel they can take little care when preparing their tax filings, but they shouldn't.

There are seven specific things that millions of taxpayers do every year that may end up getting them audited. These things seem relatively harmless, but if questioned could cost a person a significant amount of money and time in the future. These things are:

  • Rounding numbers to the nearest hundred instead of dollar
  • Claiming charitable donations without having proper documentation
  • Failing to report all sources of income
  • Claiming too many business losses
  • Reporting too many business expenses
  • Deducting a home office
  • Making math mistakes

Connecticut residents carry a significant tax burden

When it comes to taxes, not all states are created equal. Some have higher tax rates than others, which can greatly affect residents' economic positions. Connecticut residents in particular carry a significant tax burden, as tax rates here are some of the worst in the country.

According to a recent report, Connecticut ranks 6th in the nation for states with the heaviest tax burden. This was determined by looking at how much residents of each state pay in sales, property and income taxes every year. The percentage of income put toward the payment of taxes was also considered when ranking each state. 

Not filing tax returns will catch up with you at some point

Like other Connecticut residents who haven't file tax returns for several years, you may have had one bad year where you failed to file, but thereafter, it became a downward spiral. Granted, if you are due a refund, you are not obligated to file a return. However, you only have three years to do so in order to get the money the IRS owes you.

Perhaps the problem is that even if the IRS owed you a refund for one year, you owed the following years, so you know that you won't see a penny of that refund anyway. Then, you just kept going for years not filing your tax returns because you fear you will end up owing a substantial amount of money in taxes, penalties and interest. That may be true, but eventually, the IRS will catch up with you.

Being audited? Don't panic

Being the subject of a tax audit can be an unnerving experience. Panic is the overall feeling people have when they find out they are being audited. However, Connecticut residents can help themselves by remaining calm and seeking assistance to handle the matter as swiftly as possible.

Why shouldn't people panic about tax audits? First and foremost, they are not all that common. It is believed that less than 1% of taxpayers end up being audited each year. The Internal Revenue Service simply lacks the resources to perform more audits than that, and that isn't changing any time soon.

Filing for an extension could increase your tax debt

There are plenty of reasons why some Connecticut residents will be unable to have their taxes completed and filed by this year's deadline, which is fast approaching. The Internal Revenue Service allows those who require extra time to prepare and file their tax returns the ability to request extensions, which would give them until mid-October to have everything squared away. While an extension can be a helpful tool, for those who owe money, it can actually end up increasing their tax debt.

Some individuals mistakenly believe that an extension not only gives them more time to file their tax returns but also more time to pay. The truth of the matter is, interest and penalties will start accruing the day after the year's established tax deadline -- and for the year 2020, the deadline is July 15. There is one thing taxpayers can do to escape or minimize these penalties, and that is pay taxes owed by the tax deadline, even if one's tax return is not yet ready to be filed. 

What happens if you plead guilty to tax evasion?

Being charged with committing a tax crime can be a frightening thing to experience. Tax evasion, for example, is a serious crime that can have significant consequences if one is convicted. For some Connecticut residents, choosing to plead guilty rather than go through a formal trial may be the best option. What happens when one pleads guilty?

Recently, the business owner of a construction company located in Old Saybrook was accused of failing to report hundreds of thousands of dollars of taxable income over the course of four years. The income is said to have come from his company earnings and gambling winnings. According to the Internal Revenue Service, this individual owed nearly $200,000 in federal taxes.

Do tax liens affect one's credit?

Connecticut residents who owe money to the Internal Revenue Service may find that it tries to collect in ways that can be extremely harmful to one's way of life. Tax liens, for example, offer the government the ability to claim an interest in one's property. This means that, if tax debt is not paid, the IRS will have first dibs on seizing property so that it can be sold to pay the debt. Tax liens also have the ability to affect one's credit, which may be good for some but can cause others to suffer further financial harm. 

Thankfully, as of April 2018, tax liens are no longer reported to the credit bureaus. Why? It is believed that liens and judgments were not always being reported correctly. Will things always stay this way? Only time will tell, as the policy can be changed at any time. 

Can the IRS garnish my wages?

If you are behind on paying your taxes, as many Connecticut residents are, and you have not taken any steps to work with the Internal Revenue Service to rectify the situation, certain actions may be taken against you in an effort to collect the money owed. One such action is wage garnishment, also referred to as a wage levy. Yes, the IRS can have your employer send a portion of your check straight to it, and no court order is required for this to happen.

The IRS cannot take your entire paycheck unless you have other sources of income. A portion of your income will be left to you to live on, but you may find it not enough. How much is taken each pay period depends on a number of factors, including your tax filing status, number of dependents and any court-ordered child support you may owe.

Reviewing your estate plan in light of the TCJA

Creating an estate plan often requires a great deal of consideration, research and thought. Like other Connecticut residents, you will need to figure out how to divide your assets, choose the individuals you want to administer your estate and/or trust, and consider the tax implications of your decisions at both the state and federal levels.

If you created your estate plan prior to 2018 when the Tax Cuts and Jobs Act went into effect, you may wonder whether your plan could benefit from some tweaks. If you have not already done so, now would be a good time to review it.

How long does the IRS have to start the audit process?

It is no secret that the Internal Revenue Service is extremely short-staffed and has been for some time. It can take agents years to review and identify tax returns that may need to be audited. Thankfully, though, there is a statute of limitations for starting the audit process, and knowing what the deadline is can help Connecticut residents determine how long they need to hand on to their tax records.

The statute of limitations for which the IRS may audit the typical taxpayer in Connecticut is three years from the date of filing. So, if one filed on April 15, 2020, the IRS has until April 15, 2023, to start an audit on the return. There are a few states where the statute of limitations is different, but for most states, it is three years. This means one will want to keep tax records at least until the deadline has passed.

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Baker Law Firm, P. C.
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Danbury, CT 06810

Phone: 203-648-4737
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