Penalties | robergtaxsolutions.com

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Forever! That’s what I said. I realize that I’ve made posts about keeping your tax returns before and I’ve said ten years, or even less, but I’ve changed my mind. Keep your tax returns forever! Keep your W-2s also.

Why am I going all crazy about this? Because it seems the state of Missouri doesn’t care how old your old tax issues are. If they think you owe back taxes, there is no statute of limitations. Let me repeat that—NO STATUTE OF LIMITATIONS!

Over the past few months I’ve seen them go after people for back taxes from 2000, 1999, 1995, and my favorite: 1987. Yes, 1987, that’s 26 years ago. If you were asked to produce your tax returns from 26 years ago, could you? I couldn’t.

Here’s the thing—if Missouri believes that you have not filed, or that you perhaps filed but still owe, you’re going to need to provide some sort of proof of payment or filing. If you didn’t keep your tax returns, how can you prove it?

Here’s how it works: Let’s say you filed your federal taxes back in 2000 but for whatever reason your Missouri return was never received by the state. If you had a state tax liability of $1,000 back then, with penalties and interest added, you’d owe $1902 today (May 2013). That’s almost double your tax liability. But it’s not just the fact that your tax liability doubled—Missouri has no record of the withholding you paid. It’s quite possible that you already paid all of your taxes with your withholding, but since Missouri doesn’t track that information, they have no record that you already paid those taxes. Unless you’ve held onto your W2s from back then, you can’t prove you’ve already paid and Missouri is going to want their money.

So, I have officially changed my position. From now on, I say keep all of your tax returns and your W-2s forever. It’s okay if they are digital copies, but it’s absolutely essential that you retain those copies. Hopefully, you won’t need them. But if you do, you’ll be glad you’ve got ‘em.

Photo by left-hand at Flickr.com

This is one of those geeky tax court issues that I usually don’t report on, except this is sort of a big deal for normal people, so I figured I should write about it.

The quick scoop of the case is that Robert and his wife Diolinda filed their 2007 tax return with lots of mistakes. To be brutally honest, I think they were trying to pull a fast one and got caught, but the court document refers to the tax underreporting as “errors” so I will too.

Anyway, these “errors” amounted to Robert and Diolinda owing an additional $44,643 in taxes. That’s a lot of money. And if the IRS finds that you’ve under reported the tax you owe by over 10%, they add additional penalties. In this case, the penalties amounted to an additional $8,179.

So why is any of this relevant to the rest of us? It’s because of those penalties. Robert argued in his case that he shouldn’t have to pay the penalties because he suffered from various health ailments including depression, cardiac disorders and memory loss. He had suffered from those ailments since 1997. He also claimed that he used the tax software Turbo Tax and that other people who used Turbo Tax did not get assessed penalties due to computer errors.

The response from Tax Court? Well I’m paraphrasing here but basically they said, “Garbage in, garbage out.” You see, if you use Turbo Tax and you follow the directions and prepare your return the way Turbo Tax tells you to—well then you should get a proper tax return. If you input your numbers correctly and Turbo Tax messes up your return, then Turbo Tax would be to blame. But if you go and input a bunch of crazy crap—then it’s your own fault your taxes are wrong and you can’t blame the errors on Turbo Tax. The court basically decided that Robert and Diolinda input a bunch of crap (like I said, paraphrasing.)

What about the argument that Robert’s poor health, confusion and memory loss was an excuse for the errors? The Tax Court held that since he failed to get competent help for preparing the return that it counted as negligence—so bam—penalties.

So what does this mean? If you are mentally or physically unable to prepare your own taxes properly, then you need to get competent help to assist you.

The case is Robert L. Bernard and Diolinda B. Abilheira v. Commissioner of Internal Revenue. It was filed on August 1, 2012. Here’s a link if you want to read the whole case: http://www.ustaxcourt.gov/InOpHistoric/bernardmemo.TCM.WPD.pdf

Tag: Penalties

How Long Should I Hold My Tax Returns? Forever If You Live in Missouri!

Tax Court Determines that Poor Health and Turbo Tax is No Excuse for a Bad Tax Return