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An IRS audit isn't a reason to panic but rather to plan

Every year, no matter what else happens in your life, you will have to file your taxes with the federal government and the state government where you reside to verify that you have paid your income taxes in full. Some people may have to pay additional taxes, while others receive a refund for an over-payment throughout the year due to higher withholding than was necessary.

For most people, the hassle of filing a tax return is the worst stress that the Internal Revenue Service (IRS) will ever cause them. However, for a smaller subset of the population, the IRS will want to audit their financial records and verify if they owe more taxes or have manipulated the system by claiming deductions they shouldn't have received.

What to know about 2020 tax rules

Georgia residents and others who are getting ready for the 2020 tax year have just received critical information from the IRS. The government agency announced that the standard deduction for single filers is going to be $12,400. For those who are filing jointly with a spouse, the standard deduction will be $24,800. There are deductions available for those who are blind or who are over the age of 65 during a given tax year.

These deductions are available regardless of a person's filing status. Income brackets have been adjusted to account for inflation. A person filing on his or her own would pay an income tax rate of 10% on income up to $9,875. Individuals who make $518,401 or more per year would be in the top tax bracket of 37%. For those who are filing jointly, they would be in the top tax bracket if they made $622,051 or more in the 2020 tax year.

The perils of misunderstanding tax laws

The tax code can be confusing to taxpayers in Georgia and throughout the country. However, it is important to know the difference between fact and fiction when it comes to paying taxes and filing returns in a timely manner. Those who earn money from a side gig will need to pay taxes on that income, but it is their responsibility to make payments on a quarterly basis.

Another mistake that individuals make is to assume that they won't be audited based on their income. Overall, about 1% of tax returns are selected for audit in a given year. However, the rate was just over 2% for those who filed a tax return claiming that they hadn't make any money in 2017. Therefore, it is important that taxpayers file accurate returns regardless of how much they make as any taxpayer could face an audit.

IRS criticized for not fully implementing new audit system

In 2016, the IRS announced that it would change the way it conducts corporate audits. Instead of examining a company's entire tax return, it would simply examine any transactions it deemed to be risky in nature. The hope was that this would help to complete these audits in a timely manner. However, an agency watchdog said that the government has not fully implemented the new system.

A report found that only 15% of corporate audits are being conducted using the new system while the rest are being conducted using the old system. The IRS has also been accused of not using past results to guide its selection of future returns to examine. In response, the agency said that it was using data when choosing which returns to examine more closely. Budget cuts are partially to blame for the fact that the audit system hasn't been rolled out as smoothly as the government would like.

Look for an IRS tax question regarding cryptocurrency

In Georgia and across the United States, taxpayers may want to pay attention to two new Internal Revenue Service (IRS) tax guidelines. Watch for a new checkbox located on Form 1040. This checkbox will inquire whether the taxpayer received, sold, sent, exchanged or acquired virtual currency during 2019. The checkbox is the first item located at the top of Schedule 1. A similar question will appear on Schedule B, Part III. This question, located next to Foreign Accounts and Trusts, asks the taxpayer whether they had any holdings in a financial institution located in another country in 2019.

Regarding cryptocurrency holdings, it is interesting that some taxpayers are not required to file Schedule I. The IRS will now require taxpayers to file Schedule 1 even if they do not normally need to file this schedule. The distinguishing criteria will focus on whether the taxpayer had any involvement with cryptocurrency holdings during 2019. This may pose a problem for taxpayers who still fill out forms by hand instead of relying on tax preparation software. It is even possible that a professional tax preparation representative may neglect to ask the question.

Probate, taxes and your job as executor for the decedent

Let us say that your favorite aunt named you as the executor of her estate. Aunt Lucy passed away suddenly, and her estate must now go through the probate process.

Your responsibility in administering your aunt’s estate includes paying outstanding debts and filing taxes. As to the latter, you may run into a problem that requires legal help.

Factors that may determine the timeline for an audit

Generally speaking, the IRS can audit tax returns sent in by Georgia residents and others for three years. However, there are scenarios in which the government could have twice as much time to inquire about a return. If someone commits an especially egregious violation of the tax code, there may be no statute of limitations imposed on the IRS. The federal government typically has six years to audit a return if a person fails to disclose more than 25% of his or her income.

The same is true for those who significantly underreport the tax basis of an item sold during a tax year. This is in spite of the fact that the Supreme Court ruled that the government should only have three years to intervene in such a scenario. However, a law was passed extending the timeline for an audit to six years in such cases.

It is easier for the IRS to target poor people

Georgia residents may be interested to learn that the IRS has been targeting lower income taxpayers with audits. Part of the reason why the IRS uses this strategy is because they say it is easier and something that they can accomplish using less skilled employees.

Audits that are designed to look into low-income people who claim they earned income tax credit only cost around $150. These audits are seen as an effective way to use the IRS's resources as it only takes around five hours to carry out per return.

Don't risk rendering an estate plan ineffective

Some Georgia residents may feel as if they have no need to review or update their will or trust. However, a person's needs and wishes can change dramatically from the time that they first write a will or create a trust. For instance, an individual could welcome a child or grandchild into the family, and that new family member may need to be included in estate plan documents.

It is also possible that an individual gets divorced or experiences the death of a spouse. An estate plan would likely need to be altered after these events take place as well. In some cases, a person may find that his or her final wishes have changed since the plan was created. This could happen because of a falling out with a close family member or after reconciling with an old friend.

IRS mails settlement offers to participants in tax scheme

In the past, individuals who participated in micro-insurance transactions were likely audited by the IRS. The tax agency has listed the scheme as one of its "Dirty Dozen" tax scams, and it has been talking about the practice for many years now. It says that there are about 500 cases involving micro-insurance transactions currently being contested in court. However, the IRS has never lost such a challenge from taxpayers in Georgia or anywhere else.

Recently, the IRS mailed settlement offers to more than 200 taxpayers. Those who accept the offer must show that they have given back the benefit derived from claiming these transactions on a tax return. Depending on the circumstances of the case, they must also be willing to pay financial penalties. While micro-captive insurance providers have drawn the ire of the IRS, captive insurance companies have been seen as legitimate business entities since 2002.

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