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.
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.
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.
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.
While it's true that most Georgia residents do not look forward to the yearly ritual of filing and paying taxes, at least there's some satisfaction, and perhaps a degree of relief, when it's over and done for the year. However, for those who receive the dreaded audit letter, the real problems may just be starting. Not every audit, however, is cause for alarm. The best way to be prepared is to understand the basics of what an audit is and the best manner in which it can be addressed.
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.
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.
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.
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.
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.