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:

Record Keeping English | Spanish | ASL

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.

“Gang of Six” plan to avoid default would include ambitious tax reform package.

In the afternoon of July 19, the “Gang of Six” deficit reduction plan aimed at avoiding a looming debt default appeared to be gaining traction in Washington. The plan includes substantial tax changes.

The President publicly endorsed the “Gang of Six” plan's overall approach, Senate Majority Leader Harry Reid (D-NV) offered it a qualified nod, Senator Roger Wicker (R-MS) is reported to have said the package could clear the Senate, and Senate Budget Committee Chairman Kent Conrad (D-ND), one of the bipartisan “Gang of Six” Senators, said the response he received from a number of his colleagues was very favorable.

Broad tax changes contemplated. The latest word about the plan is that it will shave $3.75 trillion off the deficit over ten years and will contain about $1.2 trillion in new revenues.

An unofficial summary of the bipartisan plan calls for the Senate Finance Committee within six months to report a comprehensive tax reform package that delivers “real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth.” Specifics of the tax changes covered in the unofficial summary include:

• A single corporate tax rate between 23% and 29% and shift to a competitive territorial tax system.
• Tax simplification that involves reducing the number of tax expenditures (i.e., tax breaks) and reducing individual tax rates. There would be three tax brackets with rates in the range of 8%–12%, 14–22%, and 23%–29%. To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond initial targets, this revenue would go to additional rate reductions and deficit reduction, not to new spending.
• Permanent repeal of the alternative minimum tax (AMT).
• Reform, rather than elimination, of tax breaks for health, charitable giving, homeownership, and retirement.
• Retention of the earned income tax credit and child tax credit, or creation of an alternative that would provide at least the same level of support for qualified beneficiaries.

IRS Withholding Calculator

If you have too little federal tax withheld from your pay, you could end up owing a lot of money when you file your taxes. If you withhold too much, you will get a large refund next year, but that means you gave up the use of your money for several months during the year.

You may want to adjust your federal tax withholding with your employer. You should also evaluate your withholding if you have recently married or divorced, added a dependent, purchased a home, changed jobs or retired.

The withholding calculator at IRS.gov can help you figure the correct amount of federal withholding and provide information you can use to complete a new Form W-4, Employee’s Withholding Allowance Certificate.

Before you begin, have these items:

• Your most recent pay stubs.
• Your most recent federal income tax return.
• Here are some tips for using the withholding calculator:
• Fill in all information that applies to your situation.
• Estimate when necessary. But remember, the results are only as accurate as the information you provide.
• Check the information links embedded in the program whenever you have a question.
• Print out the final screen that summarizes your entries and the results. Use it to complete a new Form W-4 (if necessary) and give the completed W-4 to your employer. Keep the print of the final screen and a copy of your new W-4 with your tax records.

For many people, the withholding calculator is a great tool that can simplify the process of determining your withholding. (download via link below)

http://www.irs.gov/individuals/article/0,,id=96196,00.html

However, if you are subject to the alternative minimum tax or self-employment tax or if your current job will end before the end of the year, you will probably achieve more accurate withholding by following the instructions in Publication 919, How Do I Adjust My Tax Withholding, which is available at www.irs.gov

Call us at 979.846.4667 if you need a more detailed tax projection for 2011 or to discuss tax savings strategies.

IRS Urges Taxpayers to Avoid Becoming Victims of Tax Scams

The Internal Revenue Service today encouraged taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The IRS has noted an increase in tax-return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates for which they are not really entitled. Many of these recent scams have been targeted in the South and Midwest.

Unscrupulous promoters deceive people into paying for advice on how to file false claims. Some promoters may charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or IRS sponsored Volunteer Income Tax Assistance partners. In other situations, identity theft is involved.

Taxpayers should be wary of any of the following:

• Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
• Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
• Unfamiliar for-profit tax services teaming up with local churches.
• Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
• Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.

In some cases non-existent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return which results in a fraudulent return.

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives.

Promoters of these scams often prey upon low income individuals and the elderly.

They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone.

Unsuspecting individuals are most likely to get caught up in scams and the IRS is warning all taxpayers, and those that help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.

Anyone with questions about a tax credit or program should visit www.IRS.gov, call the IRS toll-free number at 800-829-1040 or visit a local IRS Taxpayer Assistance Center.

For questions about rebates, credit and benefits from other federal agencies contact the relevant agency directly for accurate information.

IRS Suspends Gift Tax Examinations of (Republican) Political Donors

WASHINGTON, D.C. (JULY 7, 2011)

BY MICHAEL COHN, ACCOUNTING TODAY

The Internal Revenue Service said Thursday it would stop its examinations of donors to tax-exempt 501(c)(4) political organizations asking whether they had paid gift taxes, after the agency came under pressure from Republican lawmakers.

The IRS sent letters earlier this year to at least five political donors questioning their donations to tax-exempt 501(c)(4) organizations, which are named after a section of the Tax Code (see IRS May Tax Political Donations as Gifts). In the letters, the IRS wrote, “Donations to 501(c)(4) organizations are taxable gifts, and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709).”

The 501(c)(4) organizations have become an increasingly popular vehicle for soliciting political donations as the donors do not have to be named by the groups. Republican-leaning groups like Crossroads GPS and Americans for Prosperity played a particularly large role in the 2010 elections, and Democrats have also begun organizing their own 501(c)(4) organizations.

In response to reports about the IRS probe, Republican lawmakers began asking the IRS for information about the inquiry (see Senators Question IRS on Gift Tax Enforcement and Political Influence and Congress Demands Answers from IRS on Gift Tax Probe). In response, the IRS said Wednesday it would stop pursuing the examinations.

“Recently, questions have arisen regarding the applicability of the gift tax to contributions to 501(c)(4) organizations,” said the IRS on its Web site. “The Internal Revenue Service has little history to draw from in this area and the limited guidance we previously issued on this matter is almost thirty years old. While we review the need for additional guidance or legislation, we will not use resources to pursue examinations on this issue. Any future action we take will be prospective and after notice to the public. As we consider this issue, it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.”

House Ways and Means Committee Chairman Dave Camp, R-Mich., who was the lawmakers questioning the IRS probe, welcomed the IRS announcement, but said he still wanted to know why the IRS had begun the examinations.

“I am pleased that following my and other inquiries questioning the motives behind these investigations, the IRS has decided to immediately suspend all current gift tax examinations in this area and will not begin any new investigations before issuing public guidance,” he said in a statement. “However, I remain troubled that the IRS has failed to explain what prompted these audits in the first place. It has yet to adequately address why taxpayers were given no warning prior to the launching of these investigations. Furthermore, the IRS has failed to clarify that the gift tax will not apply to future political donations. Especially troubling is that the directive explicitly leaves open the possibility of future audits. Given the lack of transparency, I will continue my investigation until the complete story behind the actions of the IRS has been told.”

Sen. Orrin Hatch, R-Utah, who had also written to IRS Commissioner Doug Shulman asking why the agency was conducting the examinations, said he too wanted to know more about the origins of the probe.

“This decision today ensures that the IRS remains free from even the hint of undue political influence,” said Hatch. “It cannot be turned into an arm of political retribution or payback. It must remain independent. While I commend Commissioner Shulman for making this decision, there are many unanswered questions that still need to be answered. Namely, why did the IRS choose to enforce this in the first place? And did politics play a role in that decision?”

Ofer Lion, a tax lawyer with Mitchell Silberberg & Knupp in Los Angeles who brought the IRS enforcement initiative to light, was pleased with the IRS’s decision. “I think it’s the appropriate response,” he said in an interview. “Instead of sending out letters to just five different donors, they should have taken up some public discussion and debate and issued some public guidance. That’s what should have happened, and that’s what they say will be their path going forward.”

He thinks the IRS won't conduct any further examinations until after the 2012 elections.