Filed under: IRS, Representation, Small Business, Uncategorized
A few years back I represented a client who had lost all of his tax records in a flood. He had excellent documentation of the flood, but the IRS didn’t care about that, they still wanted him to back up some items that he had deducted on his tax return from a few years back. They wanted copies of receipts for expenses that he claimed on a tax return that was destroyed in the flood. He filed the receipts with the return, everything was destroyed.
This year, with all the tornado damage across the Midwest, including my own neighborhood, it seems like reconstructing records is an important topic.
First the easy stuff: You can get a copy of your tax return transcript for free from the IRS. If you still live at the same address that was on your last tax return, you can do it online at: https://sa2.www4.irs.gov/irfof-tra/start.do
If your address has changed, you will either need to fill out form 4506T, here’s a link to that: http://www.irs.gov/pub/irs-pdf/f4506t.pdf or call the IRS at 1 800 829-1040.
Not only can you get information about your tax return, but you can also get information from your W2s, 1099s, and 1098 forms if you need it. Note: the IRS W2 information does not include your state tax withholding, this is really a problem if you’re having a state tax issue, but at least you’ll have a list of your employers and you can contact them if you need that.
So that gets you the information that the IRS already has about you in the first place, but how can you reconstruct documentation when all of your files have been destroyed? One thing in your favor, although the IRS requires actual receipts during an audit, if you’ve been the victim of a flood or tornado or some event where your documentation is lost, they will allow you to prove you expenses some other way. But don’t just walk into an audit and say, “My files were destroyed you’ll just have to take my word for it.” We’re talking about the IRS, they don’t take your word for nothing. You’ll have to show them that you put some effort to recreating your expenses and it had better look plausible. So what should we look at?
- Bank Statements: this is really easy if you have a business account and you run all your business expenses through that one account. Even if you’re running your business expenses through your personal account, it still provides you with proof of payment. Most banks let you access your statements on-line for free. Some banks still charge a fee for old statements but they should at least be able to access them for up to three years back.
- Credit card statements: Once again, you can often get these online for free.
Bank statements and credit card statements are your two biggest and best sources of expense documentation, not just for business expenses, but also for proving your charitable donations which is another expense item that’s often looked at.
After you’ve proven your expenses, you may need to recreate your mileage log. That can be tough, but once again, if you don’t try you’ll lose the entire deduction.
- If you still have your appointment calendar, start from day one and figure out where you’ve been and Mapquest everything. (I’ve done this with folks who hadn’t really lost their data, they never had a mileage log in the first place. Technically you’re supposed maintain it on a daily basis, or at least at the end of each week.)
- If you’ve lost everything though, you probably don’t have your appointment calendar to work with. You can check with your oil change company. They keep records of your mileage at each oil change. This will at least give you a baseline to work with. (Hint: if your oil changes show you put 12,000 miles on the car don’t try to claim that you drove 20,000 miles for business.)
- Once, for a client that had lost her mileage log, I was able to show the IRS that she routinely went to a certain store once a week for her supplies. She had driven on some business trips to various cities and we could prove that from her credit card statements as she had made charges in Nashville, Indianapolis, and some other cities. I used those charges to vouch for her mileage there. Although I didn’t have a “perfect” log book, by pulling together that information, the IRS auditor allowed the entire mileage claim because it was reasonable for what the taxpayer was doing.
- If you are in the same line of work, you can take a 90 day sample of your daily business mileage and use that as a sample of what you normally do throughout the year. The problem here being that you might not have the luxury of 90 days to pull a sample together. If you have nothing else to work with, I would at least do a sample log for as long as you can—something is better than nothing.
The most far- fetched proof I ever provided to the IRS was for a client who was adamant that an expense that the IRS had disallowed was legitimate. We couldn’t find a record of it in the bank statement, and it wasn’t something that would go on a credit card. It was a very normal and logical expense for the business but I just couldn’t prove it. (The company refused to provide my client with a new receipt because they were upset because she fired them. Oopsie.) Anyway, I pulled up the company’s web site and they advertised their prices on line. I had printed out the website price list and the agent allowed the expense. I don’t believe that would work under most situations, but once again, if you have nothing else to use it can’t hurt.
As you can see, reconstructing expenses for a tax audit is not fun. (Okay, let’s be real, audits in general aren’t fun but they’re definitely easier if you have all your ducks in a row.) Now might be a real good time to think about how you’re storing your important data. Are you backing up to the “cloud”? Maybe you copy your annual records to a jump drive and store that in your safe deposit box? Or perhaps you have a fireproof box that you keep your records in? It’s a good idea to plan ahead, just in case there is an emergency.
One summer job opportunity is the unpaid internship. With the job market being so tight, it might make sense for you to consider working at an unpaid internship to gain some practical work experience which would make you easier to hire in the future. But before you accept an unpaid position, there are a few things that you should think about:
- Do you need the money? Dumb question, I know, every teenager needs money. But seriously, if you need a job because you have to pay your tuition, or buy a car, or whatever, then the unpaid internship is not an option for you. You’re better off flipping burgers at McDonald’s and getting a paycheck.
- What’s in it for you? I hate to sound like a mercenary, but if you’re going to work someplace for free, there has to be an upside to it. Will you learn a new job skill? Will you meet people who can help you get a better job next summer or during the school year? Will it look good on your resume? What is it about this job that makes it worth it to you to do the work for free? If the answer is nothing, then maybe you shouldn’t waste your time there.
For example: there’s an organization I know that routinely hires unpaid interns. The positions are part-time and usually last three or four months. The interns work on interesting projects, meet all sorts of clients of the business, and their employers openly promote them, “Do you know our intern Sarah? She’s graduating in May with a degree in accounting, I was wondering if you were looking to hire anyone?” No, I couldn’t hire Sarah but I did know of a company that was hiring and I suggested it. Her employer said, “I know they’re hiring, but they have a high turnover rate. I don’t think they treat their employees very well, we want Sarah to find a good job.” If you’re taking on an unpaid internship, you want to be someplace like that, where they actually care about you.
Another organization I know had a completely different attitude about the unpaid intern. The job consisted of sitting alone in a room making telephone solicitations for 40 hours a week. That’s not an internship, that’s slave labor. Their reasoning was that the economy was so bad that they could get a teenager to do the work for free if they called it an internship. They gave up on the idea of that internship, but I can imagine other organizations using the same logic. Here’s a good rule to thumb to follow: if you are actively engaged in bringing money into an organization, then you should be compensated for that type of work. Sales people get paid for their sales, period. If the job consists of sales or soliciting funds, it should be a paid position.
Taking on an unpaid position can be even more challenging than taking that paid job. For one thing, you’re going to work every day and there’s no paycheck waiting as your incentive, you have to really want the job. Do your homework; Google the company, make sure its a place you won’t be embarrassed to say you worked for. Maybe even Google your boss, make sure he’s not some serial killer that was just released from prison. (You think I’m joking here, no. Exaggerating, yes, joking, no. Google your boss.) Ask questions about what you’re expected to do and how you’re expected to do it. Know what you’re getting into.
If you do decide to take on that unpaid internship, treat it like a paid position. Dress appropriately for the job, always be on time, and do your best work. The reason you take the unpaid internship is to be a stepping stone to a paid position. The best way to do that is to make a good impression on the people you’re working for. If you slack off, you won’t get good references, and that’s the whole point of taking the unpaid job in the first place.
I just received my IRS newsletter and they offered a tax guide about teens getting summer jobs. I was going to blog about that anyway, so I thought I’d read their guide and use a lot of their points. Here’s the link: http://www.irs.gov/pub/irs-utl/oc_-_may_-_summrjobtips_050211.pdf. If you took a look, you’ll notice that they even set it up for folks like me to copy and paste. Kinda sweet.
But here’s my problem with it, the page says that if you do odd jobs like babysitting or lawn mowing then you have to record that as self employment and pay self employment tax on it. That means that if I hire Alex from across the street to mow my lawn once a week, and I pay him $25 a week for the entire lawn season—that’s 28 weeks where I live, he’ll have earned $700 and, according to that IRS newsletter, he’ll have to pay self employment taxes on that. Normally, a student earning only $700 would pay no taxes at all, but because Alex is self employed, he’d have to pay about $90. Suddenly that lawn mowing job isn’t looking so good.
Let’s call the IRS to the rescue! You see, in IRS publication 926 (yes that sounds awfully dull but ya gotta fight fire with fire) the IRS lists jobs that are considered to be “household workers”. One of those jobs is a yard worker, like Alex. (Babysitter is another one.) What makes a household worker an employee is if the homeowner controls not only what work is done, but how it’s done. For example, I want Alex to mow my lawn on Thursdays. I want the grass shorter in the spring and longer in the summer, and I want him to leave the clippings on my lawn unless it’s really overgrown. Alex doesn’t have a lot of say in this so that makes him an employee.
Why does any of this matter? Because as a household employee, Alex doesn’t have to pay self employment taxes, that would be his employer’s job (that would be me.) But it gets better, since I’m only paying him $700 this year, his wages from me are below the threshold for having to pay social security and medicare taxes so we’ve got a “win/win” situation. As long as the employer pays a person less than $1,700 in a year, then there are no employment taxes. Alex can work and keep his whole $700.
Now here’s the best part of all—Alex is only 16. If you hire a household worker who is under age 18 at any time during 2011, you do not pay employment taxes at all. I could give Alex a raise (please don’t let him read this, okay?) I could also hire him to do some landscaping work in addition to mowing my lawn. Let’s say that I paid Alex $3,000 for work he did in my yard. If he filed a tax return as being self employed, he’d pay almost $400 in self employment taxes for 2011. As my household employee, he pays $0. (I live in Missouri, so if I paid Alex over $1000 per quarter, I would have to pay for unemployment insurance, but that would by my expense, the boss, not the employee.)
So, if you’re looking for summer work and you’re under 18, don’t overlook those old standbys of babysitting and lawn care. And if somebody tries to make you pay self employment taxes, tell them to go read Publication 926. It’s all there in writing. http://www.irs.gov/publications/p926/ar02.html#en_US_publink100086722
Schools almost out and it’s summer job time. Here are five things you should know before you go to work:
1. The federal minimum wage is $7.25 an hour, but if you’re under 20 years old and you’re a new hire, the business can legally pay you $4.25 for the first 90 days of your job. There are also exceptions to the minimum wage laws for student workers, student learners and persons with disabilities; so if you fall into one of those categories you may not receive the $7.25 per hour even if you work longer than 90 days.
2. The minimum wage for people who get tips is $2.13 per hour, (basically restaurant wait staff) if that amount plus your tips brings you up to the minimum wage. If you’re working in a restaurant keep really good track of the tips you receive. Every night you’re going to want to count out your tips and write it down. (It’s called a tip log.) You might need this as evidence at tax time that you didn’t really make as much money as your employer claims you did.
3. Wages: if your employer is going to pay you “wages”, you will need to fill out a W4 form. Here’s what one looks like: http://www.irs.gov/pub/irs-pdf/fw4.pdf Don’t bother with all the questions at the top, just go straight to the bottom part where you start filling in your name and address. Check the box that you are single. On line 5 you are going to write 0 exemptions. If this is your first job ever and you’re only going to work over the summer and you are positive that you won’t make over $5,600 for the entire year, then write the word “exempt” on line seven. That means you’re telling your boss that you don’t want any federal income tax withheld. If you want to get a refund next April, then don’t write exempt, just keep the 0 on line 5 so there will be withholding.
4. Social security and medicare. It’s kind of hard to wrap your head around the idea that you’re paying social security and medicare taxes when you’re only 16 or 17, but you are. When you get your first paycheck, even if you say that you don’t want any federal income tax withholding, you will still be paying social security and medicare taxes. Let’s say that you get a job at $7.25 an hour and you worked for 20 hours before your first paycheck. Your pay should be $145. Your check though will only be for $136.81, because your employer has to take out $6.09 for social security and $2.10 for medicare.
5. Self employment. Some employers don’t want the hassle of handling payroll taxes on their summer help. They don’t give you a W4 form to fill out for your withholding, they give you a W9, it looks like this: http://www.irs.gov/pub/irs-pdf/fw9.pdf?portlet=3 What that means is your boss isn’t going to pay your social security and medicare taxes for you—you’ll have to do it yourself. This is really important—if you are a W9 worker, then you’ll have to pay income taxes in April. It means that you are self-employed and that you own your own business. Generally, students who make less than $5600 a year pay no income tax come April, but if you are self employed, you will pay taxes if your income is over $400. Every year I have to help students who found they had to pay taxes they had no idea they owed. It’s okay to work a W9 job, but know that you’re going to have to pay taxes on it. Here’s a link for more details on that: http://robergtaxsolutions.com/2010/09/employee-or-contract-labor/
Good luck with your job hunt and have a great summer!
Filed under: Small Business, Tax Deductions, Uncategorized
Generally, when I’m filing a tax return for a business owner, I tend to use the mileage rate. For many of my clients, it’s the best deduction for them financially. For some of them, I use mileage because they don’t keep good enough records for me to use their actual expenses.
To be honest, I hadn’t really pushed the actual expense method much, but with gas prices creeping upwards of $4 a gallon and the IRS mileage rate at only 51 cents a mile, it’s time to rethink strategy. Remember, you never want to leave money that’s yours on the table for the IRS. If you want to claim your actual auto expenses for your business, there are some things you need to know.
First, whether you claim your mileage or your actual automobile expenses, you still need to keep records of your business mileage. A real common mistake people make is they think that they can hand over a bunch of receipts and claim their actual business auto expenses. It doesn’t quite work that way. You have to track your business versus your personal miles in order to determine a percentage. Let’s say you saved all of your receipts for your auto expenses and they totaled $5,000. It means absolutely nothing if you aren’t able to tell me how many miles you put on your car this year and how many of those miles were for business. Without the mileage information to go with it, the $5,000 in receipts is pretty worthless.
Now I’m quite certain that people “make up” their mileage all the time. But I also know, if you are selected for an audit and you have claimed auto expenses; I guarantee that your mileage log will be requested. I guarantee it.
So why set yourself up for losing an audit? Keep good records, and you’ll have nothing to worry about. What’s even better is that you may even find that you have a bigger deduction to claim than you would have had just by guessing at your miles. (True story, client got audited, had to recreate his mileage log. He used to lowball his mileage estimate to avoid an audit. He’d listen to what the other guys in the office claimed and lowered his a little to be “safe.” It didn’t work. Turns out he underreported by about 5,000 miles. That’s a $2500 deduction. In his tax bracket that was worth $625. Wouldn’t you like to have an extra $625? He’s my best record keeper now.)
So now you’ve got your mileage log and you’ve determined that exactly 25% of your miles are used for business. If we go back to the $5,000 of auto expenses you had, that would give you a deduction of $1,250. You’d check that against what your deduction would be for claiming straight mileage. As long as you claimed mileage the first year you put the car into service, you can switch back and forth between actual expenses and the mileage rate. If you started with actual expenses, you have to stay with actual expenses until you change vehicles.
So if you’re claiming actual auto expenses this year, what do you need to keep track of? Besides your mileage, you’ll want receipts for your gas, car washes, auto repairs, oil changes, tags, personal property taxes, and insurance. I can hear you thinking, “I don’t have receipts for my gas. It’s too late to start for this year.” Not really. One nice thing about auto expenses is you don’t actually have to have a receipt for anything under $75—you may have to start saving the gas receipts soon, but most of us can still fill up for under $75, just barely anyway. I always get my gas at the local shell station. I always pay with my debit card. I can go to my bank statement and tell you exactly how much money I spent in gas this year. Granted, I’m boring and predictable (I do taxes for a living, give me a break!) But I bet you can reconstruct your gasoline expenses too. And from here on out, you can keep better records. Please note–when I say you don’t need a receipt, that doesn’t mean you don’t need proof, you do need proof, you just don’t need to have the little printed receipt from the gas pump if the expense is under $75.
When you claim your actual expenses, you’ll also be claiming depreciation. There are special rules and regulations about the depreciation you can claim on luxury cars, but most software programs these days will tackle that for you. Remember that you’ll need information on the date your purchased the vehicle, the price you paid, and when you placed the car in service (using it for your business.) Because you kept track of your mileage, you’ll know your exact business use percentage to claim as well.
But what about your mileage? What if you haven’t been keeping records of that? Once again it’s not too late. In a perfect world, you have perfect records for the entire year. But, if you have consistent auto usage, you can keep good records for 90 days and use those records to extrapolate the mileage for your return. (Extrapolate is a pretty big word for the likes of me. It basically means that if you’ve got good records for 90 days, we can make a pretty good guess as to how you did the rest of the year.) A full year of tracking is better, of course, but the 90 day rule has been accepted by the IRS in audits before so it’s a workable documentation plan.
It’s really not too late to start tracking your actual auto expenses for your business. But don’t wait much longer or it will be.
It’s time for spring cleaning! Every year around this time I receive phone calls from people who want to know what they can throw away. Hopefully, this will help you decide what stays or goes.
According to the IRS, normally tax records should be kept for three years. For the average taxpayer, 2007 and older can go.
While the IRS says three, I prefer seven. I personally wouldn’t throw away a tax return that’s any newer than 2004. Here’s why: Three years is the general statute of limitations for the IRS to pursue getting additional tax money from you. Oops, you accidentally omitted a W2 when you filed your 2006 return—the IRS has three years to notify you of the mistake and request payment. Normally, too late—too bad. But—let’s say you omitted more than 25% of your gross income from your return, well then-now the IRS statute of limitations is six years instead of three. How do you prove your case without your tax return?
If you haven’t filed a return at all-there is no statute of limitations so throwing away documents is certainly not a good idea there. I always recommend filing a return even if you don’t owe anything in order to force the limitation period.
(I’ve seen a few senior citizens get burned from not filing. It’s rare but it does happen. For example: A business gets audited and they have issues going back 5 years. The business finds it should have issued a 1099 so they send it late to avoid paying taxes and penalties from their audit. Now the senior citizen, who thought he didn’t have a tax issue get’s an audit letter for 5 years ago. His only income was social security and that little job he did on the side. The senior didn’t know about self employment taxes, he just figured the income was so small he didn’t have to file. Now he’s facing huge penalties and interest on a bill that’s 10 years old. Had he filed a tax return, even if he omitted the 1099 income, the statue of limitations would have prevented the IRS from coming after him 5 years later.)
There is also no statute of limitations if you file a fraudulent return. Let’s say you claim a $10,000 deduction for contributing to a charity that doesn’t exist, or one that does exist but you never really gave them the money. (Yes, that’s pretty common and yes you will get caught if you try.) That’s tax fraud, and if the IRS proves that you committed fraud on the one return, they can go back and look at another return, and another, and another. Get the picture? Now, if you’re making stuff up about your charity you won’t have any documents to save in the first place. But you should keep all of the legitimate documentation for those returns in a safe place. Once you’ve been caught committing fraud, everything else on your tax return is subject to scrutiny and without documentation, you could wind up losing your legitimate deductions also.
You’ll want to keep documents that relate to the purchase of a home, stock, or business property for longer; at least until the property is sold, and then for at least three years after that. Especially hang on to documents showing that you have purchased stock. Most people naturally hang onto home and business property documents, but stock purchase documents seem to get lost. In a perfect world, you buy your stock and the company you buy it from keeps the records and you don’t have to think about it. The world is not perfect. Hang on to your stock purchase and sale documents. Without them you’re leaving tax money on the table for the IRS.
If you are not a US citizen and you’re living in the United States, keep copies of all of your US income tax returns forever. The IRS does not provide information to the Immigration Department. Your tax returns could mean the difference between staying in this country and deportation.
If you are a foreign citizen, living in a foreign country and you file or have filed US tax returns. Keep a copy of any US tax return that you have filed and any proof of filing. For you, the proof of filing is what’s really important. If you electronically filed, you’ll want a copy of your e-file confirmation, if you mail returns, use certified mail, return receipt requested and keep those receipts with your tax papers.
If you have business expenses, you’ll want to maintain receipts and records of any expenses you have relating to your business. If you have a home office, that includes your expense records for your utilities, rent or mortgage interest also. If you’re not claiming a home office, you don’t need to save all of your utility bill receipts. Some cities have special programs for seniors where they can get rebates on their utility bills. If you participate in a program like that, you’ll want to save your receipts for as long as the program requires, usually at least a year.
One final thing: if you’re throwing away tax documents, use a shredder. Your tax documents have your name and social security number. Those two pieces of information plus your date of birth will pretty much give an identity thief everything he needs to access your bank accounts, which are often also listed on your tax returns. Be safe out there.
Mistakes happen. You file your return and later get a W2 in the mail for a job you had forgotten about. Maybe your investment firm sent you an amended 1099 because your interest income they reported was wrong. Or maybe you were talking to a friend and learned about a deduction that you should have been claiming for the past three years and you’d like a refund. What do you do?
It’s easy, you need to file an amended return, the form is called a 1040X and you can find it on the IRS website: http://www.irs.gov/pub/irs-pdf/f1040x.pdf.
An amended return can’t be filed electronically like a regular return. You must mail it in and it’s going to take about 12 weeks to process. That’s a bummer if you’re expecting a refund, but that’s the way it works. If your regular return had a refund, make sure you wait until you’ve received the first refund before you file the amended return. (If they start processing the amended return before your original refund gets paid, it can mess up you getting the original refund. You don’t want that to happen now do you?)
If you have more than one tax return that needs to be amended, you must file separate returns for each year and mail them in separate envelopes. For example, say you found out that you had missed a $1000 deduction on your Schedule A every year and you’re in the 25% tax bracket. You can’t just put $3000 on this year’s return for a $750 refund. You’ll have to amend 2010, 2009, and 2008 separately and you’ll receive three checks for $250 each. It’s too late now to claim a refund that should have gone on 2007.
When you amend your tax return, you’ll have to send in the schedules of anything that changed. In the example above, the thing that changed was on the schedule A, so that form would also have to be attached. Don’t attach any forms that didn’t change. Warning: for many folks, a change in one part of your tax return can cause a change somewhere else-most notably on your schedule A. Before you actually mail anything in, go over it carefully to see if you have any unexpected changes.
When you file a 1040X, make sure you check the box for the tax year that you’re amending. That’s a pretty common mistake. The IRS can’t process the return if they don’t know what year it’s for.
When not to file an amended return: You don’t need to file an amended return for a basic math mistake. The IRS will automatically fix that for you. You also don’t need to file an amended return if your original was missing a schedule. That’s where you get a letter from the IRS saying that you claimed something on your return but that you’re missing the supporting documents. A common example of that would be a capital gain of $2000 on your return, but there’s no schedule D to back it up. You don’t need to amend the return, just mail them the schedule D. The IRS will ask you for whatever schedule they’re looking for, you won’t have to guess at what’s missing.
I’ve talked a lot about filing an amended return because of a refund. Sometimes when you file an amended return you’re going to owe. If you have a balance due, mail the payment check with your 1040X. The IRS will probably send you a bill for interest and maybe even penalties depending upon how much you owed. Be prepared for that.
Often times, people are thinking about filing amended returns because they received an IRS letter. Sometimes, you don’t need to amend, just pay the tax. Sometimes, you really need to amend because you shouldn’t have to pay the tax but you need to submit more information. Sometimes, you don’t need to amend and you don’t need to pay the tax—the IRS made a mistake and they just need to have it pointed out to them. Before you start writing that check, get a professional opinion–you want to pay your fair share, not more than you owe.