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Can bankruptcy eliminate your tax debt?

Tax debt can be overwhelming to manage. Lingering debt can lead the IRS to punish you with collections, interest, penalties, liens and levies. Owing money to the IRS is never a good situation to be in, so you may be looking to bankruptcy as a way out. 

But whether bankruptcy will help your tax situation depends on a variety of factors. If you do not meet the specific discharge requirements, you may need to look to other methods for tax debt relief

Personal injury compensation could be taxable income

Those who are hurt in Georgia or any other state who receive a settlement could be taxed on those proceeds. In fact, an individual could pay taxes on money that is eventually paid to his or her attorney. However, not everyone will have to give a portion of their injury settlement to the government. For instance, if the award is related to a physical injury, a plaintiff will generally get to keep all of it.

If emotional stress causes a physical injury, any award related to those injuries could be taxed. In some cases, the parties in a given matter can choose how to treat a settlement for tax purposes. While the IRS does not have to agree with how a settlement is broken down, it will generally defer to the terms of the agreement whenever possible.

The TFA and the appeals process

Taxpayers in Georgia should be aware that the Taxpayer First Act changes the way the Internal Revenue Service conducts certain operations and procedures. This includes changes to how appeals are handled.

In accordance with the TFA, the Chief of Appeals oversees the Internal Revenue Service Independent Office of Appeals. Typically, all taxpayers have the right to appeal a decision by the IRS. The situations that are addressed by the TFA are those in which a taxpayer's appeal has been denied.

American citizens living abroad may receive a tax refund

American citizens who live overseas are still generally responsible for filing a federal tax return with the IRS. While many former Georgia residents who now live overseas can claim a credit for foreign income taxes paid, this has not been true for individuals residing in France. However, new guidance now allows taxpayers to claim a credit for Contribution Sociale Généralisée and Contribution pour le Remboursement de la Dette Sociale payments.

Until recently, the IRS said that these were payments for social programs, which meant that they were not deductible. It is estimated that 5,000 people will be able to claim refunds that range from $10,000 to $15,000 per year for an average of five years. To be eligible, a person must have paid American income taxes, which means that he or she would have needed to make more than the foreign earned income credit.

IRS letters aren't necessarily audit notices

Georgia residents and taxpayers throughout the country could receive notices from the IRS at any point during the year. In many cases, it is merely the government reaching out to notify a taxpayer about an adjustment made to his or her return. Taxpayers have the opportunity to dispute the adjustment by sending in additional information to support his or her claim. Notices such as the CP 2000 letter could be sent because an individual forgot to claim interest income on a return.

It can also be sent in any other situation when information on a return doesn't match what the IRS has on file. If the person who receives the notice agrees with the proposed change, that person can make a payment to the government. The amount will likely include fees and interest in addition to the principal balance owed. Generally speaking, an individual has 30 days to respond to an IRS notice, and it may be possible to consult with a tax professional before responding to that notice.

3 ways your business may become a tax headache

Starting a business is often an effective way to realize the American dream. After all, not only does a small business give you both flexibility and income, but a successful one may also provide you with something to leave your children. You do not want your business to turn into a tax headache, though. 

In 2017, the Internal Revenue Service audited about a million tax returns. Even though that number is a fraction of the total returns received, it is not exactly small. While you probably cannot eliminate your chances of an audit, you can be smart with your tax filing. Here are three ways your business venture may trigger an IRS audit

Common audits caused by investment income

There are a variety of reasons why the IRS may decide to audit a Georgia resident's tax return. However, most audits are triggered because something on a return seems unusual based on the income a person has reported. For instance, if a real estate investor writes off a high amount of mortgage interest, that could be suspect given that interest rates are relatively low. It is important to include dividends, interest and capital gains accrued during a given year.

In some cases, taxpayers will simply be asked to pay what they owe. Those who are due a refund may simply have it reduced by the IRS before it is sent out. If a mistake is discovered after a tax return is initially filed, it can be corrected by submitting an amended return.

The IRS is increasing 'hobby loss" audits

One of the benefits of owning a business is the ability to take deductions for expenses that are legitimately used in an effort to produce income. Some Georgia businesses end up in the red where expenses exceed income for the particular tax period. If this occurs regularly or in an excessive amount, the attention of the IRS may be triggered. The issue that may arise is the determination of whether the enterprise is in fact a for-profit business or if it is more of a hobby, for which losses cannot be deducted.

Tax advisers point to tax code Section 183 - 'Activities not engaged in for profit" as the authority for what has come to be known as the hobby loss rule. If a taxpayer is claiming a tax loss on a business, not only is the income from that activity not taxable, the amount of the loss reduces other taxable income, which can be extremely beneficial. Although the tax laws indicate many factors to be considered, the IRS most typically focuses on the manner in which the activity is operated to gauge whether it's a business or simply a hobby.

Fewer top earners are being audited by the IRS

According to ProPublica, taxpayers in Georgia who make less than $20,000 a year may face the same chance of being audited as those in the 1% of top earners. In many cases, low-income individuals face audits because they claimed the Earned Income Tax Credit (EITC). The EITC audit process is automated, which makes it easier for the government to perform in a timely manner.

It should be noted that low-income individuals are not necessarily being audited at a higher rate. Instead, those who are in the top income brackets are 80% less likely to face an audit when compared to 2011 figures. In that year, 8% of taxpayers making $500,000 or more were audited whereas they were audited at a rate of 1.3% in 2018. ProPublica did say that the audit risk associated with claiming the EITC may have dissuaded thousands of families from doing so.

Audit rates falling for taxpayers in most income brackets

In 2018, only .59% of federal tax returns were audited. This was a decrease from 2017; in fact, it was the seventh straight year in which overall audit rates decreased. Taxpayers in Georgia and elsewhere who made more than $10 million also saw their audit rate decline in 2018. In that year, 6.66% of such returns were audited compared to 14.52% in 2017 and 34.69% in 2015.

Fewer returns are being audited in part because the IRS has fewer resources compared to previous years. Its operating budget is down 19% compared to 2010 when adjusted for inflation. The agency says that it has lost out on $3 billion in revenue annually because it doesn't have enough people on staff. While the Trump administration has proposed increasing the tax collection agency's budget, there is no guarantee that this will happen.

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