Tag: Documentation

Posted on by Jan Roberg

Why Is My Tax Preparer Asking Me Such Nosy Questions?

With all the questions the IRS requires tax preparers to ask, getting your taxes done can seem more like an interrogation than tax prep.

With all the questions the IRS requires tax preparers to ask, getting your taxes done can seem more like an interrogation than tax prep.

 

I took a phone call from a fellow awhile back who was absolutely furious about some of the questions his tax preparer had asked him.  The preparer had asked a whole bunch of questions about his kids and even asked to see their report card from school.  He said, “My daughters are 4 and 2 years old.  They don’t even go to school yet!”

 

So what’s going on here?

 

It’s all related to an IRS form—# 8867.  Form 8867 has to be filled out and sent in with every tax return that has the Earned Income Tax Credit.  Now, this form has been around for awhile, but it used to be that a tax preparer was just supposed to ask some questions and you’d keep that information to yourself.  Now, the IRS expects you to send the form in with the tax return.  If a tax preparer doesn’t complete the form and send it in with an EIC return—the IRS charges a $500 penalty to the tax preparer.

 

 

That’s $500 per return.  You miss too many of those and you could be out of business.    For most preparers, that’s more than what we charge to prepare an EIC return.

 

Now if you prepare your own tax return, you don’t have to worry about form 8867, it’s only for paid tax preparers.  But if you have your taxes done at H&R Block, or Jackson Hewitt, or even me—that form must be completed, and signed, and sent with your tax return.  (If your tax return is e-filed, we are required to keep the signed copy in our files.)

 

And the form seems to ask for more and more information every year.  Now there’s a whole section about documents:  documents to prove your kids live with you, documents to prove a disability, and documents to prove self-employment income.   Tax preparers are now expected to look at a taxpayer’s documents to verify the information on an EIC tax return.  School records, like report cards, are usually the easiest thing to use for documentation.  Of course, report cards aren’t very helpful when your children aren’t in school yet.  No documents, no form 8867.  No form 8867, no tax return.  No tax return, no refund.

 

It’s like the IRS is trying to turn regular tax preparers into the EIC police.  It’s not a job we asked for, but it’s a regulation that we’re required to enforce.  The penalties are so stiff that we’ll all be out of work if we don’t go along.

 

So remember, if you tax preparer asks to see your child’s report card, he doesn’t care if your son got a D in math or is a straight A student;  he’s just trying to help you get your refund.

Posted on 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 by Jan Roberg

IRS Letters – the CP 2000: Common Errors and How to Fix Them

Photo by 401(K) 2012 at Flickr.com

 

Have you gotten a letter from the IRS that says something like this?

 

“The income and payment information we have on file from sources such as employers or financial institutions doesn’t match the information you reported on your tax return.  If our information is correct, you will owe…”


That letter is called a CP2000—it’s from the Individual Automated Under Reporter Unit of the IRS.   In 2012, they issued 4.5 million notices with an average of $1,572 in additional taxes owed.  That’s over $7 billion dollars!

 

Just because you receive one of these CP2000 letters, doesn’t necessarily mean that you owe the IRS any money.  So before you go writing the IRS a check, you need to take a look at your tax return and the CP2000 letter very carefully to make sure you owe before you pay.  Let’s take a look at some of the most common things the IRS is asking about.

 

Missing W2:  You’d be surprised how many people forget a W2 off of their tax return.  It’s easier than you’d think.   You could have a Christmas season sales job at Macy’s in 2011 but get a pay check for one day in January 2012.   When you file that 2012 tax return in 2013, you’ve forgotten about that one paycheck.  If you moved during the year, you might never get your W2.  If you forgot a W2 on your tax return, usually it’s just best to sign the letter and pay the tax.

 

Missing stock trades:  This is probably the most common type of CP2000 letter that I see and they fall into two categories.  The first is employee stock options.  If you work for a company that issues employee stock options, when you exercise those options, you pay the tax through your payroll withholding.   Even though the stock options are accounted for in your paycheck, you still have to do additional paperwork on your taxes. If you don’t also report the employee stock options on a Schedule D, you’ll get an IRS notice.  Usually, if this is what happened, you won’t owe any additional tax, you just need to submit the missing paperwork.

 

The other category of missing stock options consists of trades that just weren’t reported.   Many people who made the election to receive their brokerage notices online didn’t realize that their 1099B notices were online also.  I think that’s one of the most common reasons I’ve heard for people not reporting their trades.  If you fall into this category, remember that the IRS doesn’t always include stock basis when they figure your tax.   If you have stock trades on your CP2000, you’ll need to prepare an amended return and be sure to include the basis of all our stock trades.  You may still owe the IRS money, but I’ve never seen one of these cases where the person owed the IRS the full amount that the IRS stated.

 

Mismatched documents:  This happens all the time.  For example, let’s say that you have three accounts at Bank of America.  One earned $10 interest, another earned $15, and the other earned $20 of interest.  You put $45 of interest down on your tax return.  And that’s right.  But the IRS may get the documents as 10; 15; and 20 and since it’s a computer and not a human that does the matching, you could get a notice saying you didn’t report your interest properly.  You can usually solve issues like that with a simple phone call.

 

These are just a few of the more common and easy ways to solve CP2000 issues.  If you receive a CP2000 letter and it doesn’t make any sense, or you just need some help, please call us.  That’s what we do.

 

Check out the IRS link as well: http://www.irs.gov/Individuals/Understanding-Your-CP2000-Notice

Posted on by Jan Roberg

Can I Claim EIC if I Don’t Have a Job?

EIC with no income

Raising a child is a big job, we just don’t get paid for it. In order to qualify for EIC, you need to have what the IRS considers to be “earned income” which comes from a paying job.

 

 

The short answer is no.  But I’ve had about 10 phone calls or emails this week with this question, or something similar anyway, so I figured I should post something about it so people will understand it better.

 

First, EIC stands for the Earned Income Credit (or some people call it EITC for Earned Income Tax Credit, they’re the same thing.)  The key phrase here is “Earned Income”.  You earn income from a job—like working at Target, or you might be self employed like me.  I own my business so I don’t get a W2 but I still earn income.

 

Social security, welfare, child support, food stamps, VA benefits, SSI, and gifts from friends or family—none of those count as earned income.  Neither does bank interest, stock sales or dividends, or rental income.  As far as the IRS is concerned, these things do not count as “earned income” for EIC.  (I know those Smith Barney commercials say they “earn” their income, but if you’re making money in a Smith Barney account—it doesn’t get you anything for EIC either.)

 

Alimony—does not count as earned income for EIC, but it does count as taxable income and can affect how much EIC you can get.  Don’t confuse child support with alimony.  Child support ends when your kids grow up.  Alimony lasts forever or has an end date that has nothing to do with children.  Most people get child support, alimony is pretty rare these days.

 

So if you have a job that gives you a W2—you’re set because the W2 proves your income.   But if you’re self employed—proving your income is harder.

 

The IRS is demanding that tax preparers have proof of your self-employment income before we can file your EIC tax return.  We’ll be fined  for not having proper information.  So if you don’t have good records of your income,  you might get turned away by your tax preparer.

 

So the obvious question is—what records do you need to prove your income?  The IRS has a list that includes the following:  a business license, 1099MISC forms, records of gross receipts, income summary, expense summary, and bank statements.

 

The 1099MISC is really the best proof of income if you receive those.  1099MISC is given to anyone performing work for a small business that got paid over $600 during the year.  If you’re like me, you don’t get 1099MISC forms.  Most of the work I do is for individual people, not businesses so I need to prove my income another way.  But I’m an accountant—I have all the bank statements and business records and a license to back up my income.  It’s what I do for a living.  Not everyone is going to have my kind of records.

 

What do you do if you just clean Mrs. Jones’ house for $50 a week?  Or, maybe you helped paint Mr. Anderson’s garage for $200 last spring.  It’s all cash, you’re just helping out.  Those don’t seem like they’re really jobs but they are.  If Mrs. Jones gives you $50 a week for the whole year, then that’s $2,600.  Add Mr. Anderson’s $200 and you’ve got $2800.  It’s not much but it’s something.

 

If you’ve been doing odd jobs like that, you’ll need to get some kind of documentation.  Put it in writing and have the people you worked for sign it.  In the future, you should keep a log of every place you work:  the date, the location, the person you worked for, and the type of work you did.

 

You can’t make stuff up!  That’s illegal.  And remember, EIC returns with self-employment are an audit target—if you lie about this stuff there’s a really good chance that you’ll get caught.

 

But, if you really did work and you really do deserve to claim EIC, then you should be claiming it.  You just need to make sure that you’ve got your documentation in order so you can prove it.

 

The IRS has a website full of information about EIC.  Check it out:  EIC Home Page