Tax - Record Keeping & Retention

Keep Good Records Now to Reduce Tax-Time Stress

You may not be thinking about your tax return right now, but summer is a great time to start planning for next year. Organized records not only make preparing your return easier, but may also remind you of relevant transactions, help you prepare a response if you receive an IRS notice, or substantiate items on your return if you are selected for an audit.

Here are a few things the IRS wants you to know about recordkeeping.

1. In most cases, the IRS does not require you to keep records in any special manner. Generally, you should keep any and all documents that may have an impact on your federal tax return. It’s a good idea to have a designated place for tax documents and receipts.

2. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

3. If you are a small business owner, you must keep all your employment tax records for at least four years (current plus prior 3 years) after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publication 552, Recordkeeping for Individuals, Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publications 552, Recordkeeping for Individuals (PDF)
• Publications 583, Starting a Business and Keeping Records (PDF)
• Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)

YouTube Videos:

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Should you have a HSA?

Should You Have a Health Savings Account?

Written by: The Bradford Tax Institute Tax Reduction Letter – www.bradfordtaxinstitute.com

February 2011

Are you the owner of a business who is locked out of the Section 105 medical reimbursement plan because

· you are single and don’t want to form a C corporation?

· you have employees and it’s too expensive to cover them?

If this is you, you should consider the health savings account (HSA).

Let’s see if you can qualify.

Can You Qualify for an HSA?

You qualify for an HSA when you

· are covered by a high-deductible health plan as discussed in the article titled “How Tax-Favored Health Savings Accounts Work in a Nutshell,” (request that we email a copy of the article to you)

· have no disqualifying health coverage as discussed below,

· are not enrolled in Medicare, and

· may not be claimed as a dependent on another taxpayer’s return.

Health coverage that destroys your ability to have an HSA includes any health coverage that is not a high-deductible health plan, except insurance to cover the following:

· Accidents

· Disability

· Dental care

· Vision care

· Long-term care

· Liabilities under workers’ compensation laws

· Tort liabilities

· Liabilities related to ownership or use of property

· A specific disease or illness (such as cancer insurance)

· Hospital stays at fixed amounts per day, week, or other period of hospitalization

This means that you can have an HSA and the above coverages too. For more on the insurance aspects, see the article titled “Tax Tips for the HSA: Buying High-Deductible Insurance.”

Should I Put the HSA in Place Right Now?

If the HSA is the right plan for you, then you should put it in place right now.

Your first step is the insurance. You must have your high-deductible insurance policy in place before you contribute to your HSA investment account.

If your HSA does not start in the first month of the year, your investment contributions are figured on either

1. the month-of-eligibility basis, or

2. the last-month rule (this is the one you want, as explained below).

Last-Month Rule

The last-month rule allows you to contribute the maximum amount to your HSA. Under this rule, you must

1. have your high-deductible policy in place on December 1 (if you start now, it will be in place on December 1), and

2. agree to maintain your high-deductible HSA status for 12 months beginning with that December 1. (If this is the plan for you, you will want to keep your HSA for years; therefore, the 12-month commitment beginning December 1 is well worth it.)

Should you not keep your 12-month agreement, you must redo your deductions using the month-of eligibility basis for the actual qualification period and pay a 10 percent penalty tax on the excess deductions.

Planning Note

If you are going to put an HSA in place in 2011, make sure to take advantage of the last-month break because it allows you to put the maximum money in the HSA right now.

How to Procrastinate

You also can have the high-deductible insurance in place on December 1 and wait until April 15, 2012, to make your 2011 HSA investment contribution. However, as with any tax-deferred compounding strategy, you should make the contributions sooner rather than later.

Summary

Don’t procrastinate. If you can qualify for the HSA and you don’t qualify for the Section 105 medical reimbursement plan, take a few minutes and request from us an article titled “How Tax-Favored Health Savings Accounts Work in a Nutshell.”

When you receive an IRS notice

Every year the Internal Revenue Service sends millions of letters and notices to taxpayers, but that doesn’t mean you need to worry. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox. The IRS is getting pressured to be more 'efficient' in collecting taxes due. One result in an increase in notices being sent out.

1. Don’t panic. Many of these letters can be dealt with simply and painlessly and frequently they are incorrect.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
8. It’s important that you keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Of course we want to know about any notices that pertain to a return which we prepared. Also if the amount in question is significant, we want to review it with you and determine the most expedient response.