With tax season underway, now is the time to ensure compliance when it comes to your income tax returns. Last year, over 650,000 federal tax returns were selected for audit. While this number appears small when compared to the 160 million returns filed, that will soon change. With a recent increase in the IRS budget, a commitment from the Biden Administration to increase the number of staffed IRS agents, and increased scrutiny when it comes to international reporting, there has never been a better time to come into compliance.
Increased IRS funding means two things: more audits and increased scrutiny on filed returns; especially for returns filed by non-U.S. persons. With most IRS audits taking up to six months to conduct, seemingly minor steps taken now can save taxpayers from headaches down the road. Additionally, with the backlog of prior year returns that the IRS has yet to review, the question should not be “should I prepare?” Rather, taxpayers should ask themselves “how should I prepare?”
Taxes can be tricky, but the cornerstone of compliance is quality recordkeeping. In preparing to file your tax return, keeping records of your income and expenses can assist your tax preparer to take full advantage of all available credits and deductions. In the audit context, bookkeeping is essential. Time after time, taxpayers have deficiencies assessed against their tax returns solely because their records were not properly kept. This can be costly, and in many cases, result in penalties that greatly exceed the cost of properly maintaining records. Generally, it is recommended that taxpayers keep records for at least three years.
With U.S. tax filings differing significantly from other countries, foreign taxpayers are at increased risk for audit and noncompliance. Filing obligations can change year-to-year over seemingly minute issues, such as length of stay in the United States or even over the amount of money you have in your bank account. In some cases, this means increased reporting requirements: such as FBAR filings, statements of foreign financial assets, and reports of ownership in foreign businesses. Failure to report such information, despite no tax being owed, often results in penalties exceeding $10,000 per violation. Recordkeeping and due diligence are essential to avoiding these penalties and consultation with a tax consultant, especially after a significant life event such as a change in residency status, can help eliminate the risk of oversight.
In addition to filing informational returns, taxpayers, both domestic and foreign, expecting to owe at least $1,000 in income taxes on their 2022 income tax return are required to make quarterly estimated tax payments, also known as prepayments. For domestic taxpayers, the first of these prepayments is due by April 18, 2023, which corresponds to the income tax return filing deadline. For foreign taxpayers, these prepayments are also due on April 18, 2023, despite the filing deadline being June 15th, 2023. Because the prepayments are quarterly, subsequent payments will be due in June, September, and January. With interest compounding daily, failure to pay estimated tax payments can quickly add up.
For business owners and shareholders, especially foreign business owners, preparation is imperative to avoid penalties and interest. In addition to paying any estimated taxes owed, the filing deadline for your business depends on how your business is treated for tax purposes. C corporations, like individual taxpayers, have returns due on April 18, 2023. Pass-through entities such as S-Corps, partnerships, and sole proprietorships are required to file their respective returns by March 15, 2023. Many new business owners are caught off guard when they hear of the earlier filing deadline. Nevertheless, prior preparation can help ensure businesses are not hit with exorbitant penalties and interest.
With tax season officially underway, there has never been a better time to come into compliance. Preparation, planning, and a review by a tax professional can help prevent costly penalties down the road. Now is the time to communicate with your tax preparer to make sure you do not fall out of compliance. If you believe you may not be in compliance or have questions and concerns regarding your returns, Hone Maxwell is here to help.