Posted on November 18, 2013May 31, 2016 by Jan Roberg

Does This Make My Files Look Fat?

Photo by Julep67 at Flickr.com

Can You Have Too Much Documentation?

I recently got an e-mail from my friend Steve who was concerned that he was keeping his records for too long. He was looking to purge some of his files and he also wanted to know if he was overdoing it on his documentation. Steve owns a small business.

Personally, as an accountant, when Steve told me about his recordkeeping–I was just so excited! He kept such good books. But at what point do you not need all those records?

I’m posting what the IRS says on its official website in red. My comments are in black.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return. I would also add that you should keep the official tax documents that go with the return, especially things like 1099s and W2s if you are an employee. Keep anything that shows a tax payment.

According to the IRS, your need to hang onto records depends upon your situation. The situations are as follows:

You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years. What they mean is that if you don’t have any tax problems, you only need to hold on to your tax returns for three years. That’s how long the IRS has to go after you for a simple mistake like leaving an interest statement off your return. So here’s my issue with this–what if you don’t know you have a tax problem? Like what comes next—

You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years. Bingo! This is why I don’t approve of tossing documents after only three years. Here’s a good example–let’s say you’re a senior citizen with some social security, a pension, and some stocks. You sell $10,000 worth of your mutual fund for your living expenses but you had a loss so you don’t think to even put it on your tax return. (That’s a very common mistake.) So even though the missing item on your tax return was a loss, to the IRS, its $10,000 and hit’s the over 25% mark.

You file a fraudulent return; keep records indefinitely. Okay, so if you’re filing fraudulent returns, keep your records forever. Ahem…people who intentionally file fraudulent returns–well that’s just not my specialty. But normal people who screw up their returns–that is. The IRS has a hard time telling the difference between criminals and good people who do stupid things.

You do not file a return; keep records indefinitely. Okay, I say file a tax return every year whether you are required to or not. It helps protect you from identity theft and it protects you from the IRS coming after you to taxes later because you missed a document.

You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. That means if you filed an amended return to get back more money, hold on to your records for even longer.

You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years. That makes sense.

Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later. The IRS is very touchy about employment taxes. These are really important.

Of course, records relating to assets that you own should be kept for at least as long as the asset is in the business. For example: You buy a computer and you’re depreciating it for 5 years. You must keep the receipt for that for the whole five years. You buy a business building–you hang onto that document for the whole 39 years or until you sell the building.

So here’s my “Jan Rule” on keeping tax records. If you own a small business, keep your actual tax returns and back up for at least 10 years. In my next post, we’ll talk about what back up you’re going to want to keep.

Posted on August 14, 2012May 31, 2016 by Jan Roberg

Turbo Tax Users: You Need to do a Three Year Review

Photo by Images_of_Money on Flickr.com

I’ve said it before: I think Turbo Tax is a great product. I also like 1040.com, the do it yourself software you can get on my website. Good products, good results. But, they’re not perfect—none of them are. And neither are tax preparers, after all they are human and make mistakes as well.

It’s August, generally quiet time in the tax business—but no, not this week. The other day my phone rang nine times—people getting IRS letters. “Hello, I got an IRS letter, what do I do?” I suspect that the IRS must have done a mass mailing the other day for my phone to ring so much. (My phone is usually slow in August.)

Some calls are easy and I can guide someone over the phone, “Oh, just send them a copy of XYZ form, that’s all they want.” Usually though, people need to come in and have me take a look. What I’m often finding this summer—is that people are getting IRS letters saying folks owe money, but when I review their returns, they should be getting a refund instead. And while I think that’s great fun (because I’m a tax geek and that’s the kind of stuff I live for) most people don’t like getting IRS letters saying they owe thousands of dollars at all. (Although they’re usually happy when I show they’ve got a refund coming.)

But here’s the catch—these people wouldn’t know they had money coming back if the IRS didn’t send them the nasty letter in the first place! What about all the people who left money on the table but won’t get an IRS notice?

What I’m finding is that the people with money coming back did their own taxes with Turbo Tax. Not that the Turbo Tax program made a mistake but it is usually just a misunderstanding of what should or should not be listed or possibly a typo. That’s why I’m recommending a three year tax review.

Why three years? If you made a mistake on your tax return, you have three years from the date of filing to file an amendment to get your money back. This is achieved by filing a Form 1040X.

For example, let’s say back on your 2009 tax return, you typed in that you paid $1,000 in mortgage interest when really you paid $10,000. The two numbers look pretty similar but there’s $9,000 worth of deduction there that you just missed out on. If you’re in the 25% tax bracket, that’s a $2,250 refund that you’d be entitled to. Your 2009 tax return was due on April 15, 2010. So, three years from that date is April 15, 2013. If you wanted to get that money back from the IRS, you’d need to file an amended return by then.

You don’t need to do this every year, just bring in three years worth of returns once every three years. Most places charge a fee, but it’s generally much lower than the cost of preparing your returns. (I know one large tax company used to advertise that they’d do it for free.)

If your returns are fine—then you’ve got peace of mind. If you’ve been doing something wrong—well then you’ve learned something. If you get money back—well then you know you did the right thing. It’s a winning situation all the way around.

Posted on May 3, 2011May 31, 2016 by Jan Roberg

Oops! There’s a Mistake in My Taxes, How Do I Fix It? Amended Returns

When you have a tax “oops” you fix it by filing an Amended Tax Return, form 1040X.

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.