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Atlanta Tax Law Blog

The truth about common tax myths

Georgia residents may have firsthand experience with how complicated the federal tax code can be. Such confusion has led to the creation of generalizations or myths that some may have come to take for granted. While it is true that the IRS generally audits those who make more than $1 million per year, those who make under $25,000 and claim the earned income tax credit may be at risk for being audited.

In 2014, these individuals were twice as likely to be examined compared to other taxpayers. Even if a tax return is accepted, the IRS has three years to audit it. That number goes up to six years if a taxpayer failed to report 25 percent or more of his or her income for that year. Those who have cash earnings also may believe that they don't have to report their income.

How to pay taxes on time

In 2015, 10 million people were hit with failure to pay estimated tax penalties in Georgia and across the nation. This was an increase from 7.2 million in 2010. While penalties differ for each taxpayer, it could add hundreds of dollars to a tax bill. Those who derive income both from an employer and side gigs may benefit by increasing their withholding or making payments throughout the year.

It is important to understand that the tax system requires people to make most of their tax payments as they go. This means that taxpayers are generally required to pay as they make money as opposed to at the end of the year. Those who pay at least 90 percent of their estimated taxes during the year avoid paying interest on any remaining balance owed. The amount that a person pays in estimated taxes in a given year is usually based on what he or she made in the previous year.

Remember that you have rights if you are facing an audit

When you prepare your tax return, you should be aware of key tax issues that might raise red flags with the Internal Revenue Service and lead to an examination of your business practices.

IRS agents do not tell you everything about their mindset, agenda or procedures if they schedule you for an audit. Just the thought of the coming meeting may cause your palms to sweat, but remember that you have rights. 

Is it true that tax debt can be discharged in bankruptcy?

Chapter 7 of the bankruptcy code offers full discharge for your allowable debts. In Chapter 13, you can repay some debts through a court-approved payment plan, and the remaining obligations will be eligible for discharge. Chapters 7 and 13 manage tax debt in the same way.

To be able to discharge your income tax debt in a bankruptcy proceeding, you must meet specific criteria.

Why 401(k) contribution increases benefit workers

In 2018, Georgia employees and others in America will be able to contribute up to $18,500 into their 401(k) accounts. This is an increase of $500 from 2017 limits. Although an extra $500 per year may not seem like much, it could result in an extra $70,000 in a retirement account for a 30-year-old who contributes the maximum amount. A 40-year-old who contributes the maximum amount would have an extra $34,712.

If that same 30-year-old kept that extra $500 in cash, that person would have $18,500 in cash by age 67. The 40-year-old would have $13,500 in cash by age 67. The reason why such a small contribution can have such a large impact is due to compound interest. Those who can't contribute the maximum amount are encouraged to save as much as possible and increase their 401(k) contributions whenever possible.

IRS won't accept silent returns

Georgia residents and other taxpayers didn't have to disclose whether they had health coverage when filing their returns in 2017. However, the IRS says that it will not process electronically filed returns that don't address health care status in 2018. If a filer sends in a paper return, it may be suspended until adequate information is provided. Refunds may be delayed until a tax return has been processed.

In previous years, the IRS policy was to accept returns that didn't have health coverage information. It would request such information if it became necessary after the fact. As a general rule, it is easier for the government to collect information upfront as opposed to billing taxpayers later after issuing a refund. It may also be easier for the taxpayer as the issue can be resolved in a timely manner when information may be more accessible to that person.

Forest Whitaker loses in his lawsuit against the IRS

Georgians who have trouble paying their taxes might want to take heed of actor Forest Whitaker's case. The actor sued the IRS because it refused to grant him an installment plan and instead demanded that he pay all of the taxes that he owed in a lump sum payment.

Whitaker earned wages from his company, Salako Inc., in 2013 and 2014. In 2013, he reported $1,491,749 in income on his tax return and a tax bill of $426,812. During that year, his company only withheld $10,579 in taxes, and Whitaker added an additional $4,000 in estimated tax payments. The IRS assessed him $426,812 for his tax liability and sent him a notice of its intent to levy in early 2015.

The IRS view on severance pay

Some workers receive severance pay from their employer. It may be as the result of being terminated, being laid off or leaving a position. Regardless of why a person received such pay, the IRS views it as wage income subject to tax. Therefore, that payment may be subject to employment taxes and deductions that may apply even if it is received in a settlement years after leaving the company.

In some cases, a settlement may be divided between severance pay subject to payroll deductions and non-wage income. This portion of a settlement would be reported on a Form 1099. How an employer decides to classify a severance payment depends on partially on preference and partially on how seriously it takes its payroll tax obligations. A 2014 Supreme Court decision affirmed that severance pay is subject to employment taxes despite the fact that it could be argued that it is pay for services never rendered.

Using trusts to get the most from business assets

Georgia residents might like to know about legitimate ways to minimize or eliminate gift and estate taxes. Those who own a successful business may wish to freeze the value of a company to avoid taxes due to future appreciation of the company.

This strategy to reduce estate and gift taxes could save millions for some families when planning to eventually sell a business, but this must be done right. Owners must establish a trust and can then gift discounted company stock to the trust and sell discounted company stock to the trust. The stocks also qualify for a minority interest and marketability discount, so the amount in the trust is valued at more than what is put in.

Think tax and liability consequences in a business startup

If you are thinking of starting a new business, what form will it take? There are several choices ranging from a sole proprietorship to an S corporation, and much will depend on the kind of product or service you plan to offer.

When considering the kind of entity that would be best for your business, do not forget to weigh the tax ramifications as well as the level of liability exposure you would have. Here are three common examples of business formation:

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