Tax records: What should you keep, and what can you toss?

May 31, 2011

Is your file cabinet overflowing? Do you hesitate to purge tax information because you’re not sure what to keep and what to discard?

Here’s a quick guide to help you cut through the clutter.

* Assets. Keep brokerage confirmations, equipment purchase invoices, mutual fund statements, and real property closing statements a minimum of seven years after you report the final taxable sale of the asset on your return.

* Expenses. Substantiation for deductions includes charitable donation acknowledgments, receipts for employee business expenses, and automobile mileage logs. Retain these at least seven years after you file the return claiming them.

* Income. The same seven-year rule also generally applies to common tax forms such 1099s showing interest, dividend, and capital gains from banks or brokerages, and Schedule K-1s from partnerships and S corporations. However, the IRS recommends holding on to your W-2s until you start collecting social security.

Tip: Shred interim income reports once you’ve compared the totals to annual forms.

* Retirement accounts. You may have to calculate the taxable portion of distributions, so keep records detailing your contributions until you’ve recovered your basis.

* Tax returns. The statute of limitations is usually three years but can be six years if underreported income is involved. In cases of fraud or when no return is filed, the IRS has an indefinite time period for assessing additional tax.

As a general rule, keep federal and state returns a minimum of seven years.

For additional information, including how long you should store business papers and payroll reports, please call. We’ll be happy to help you establish a records retention schedule.

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May filing deadline for nonprofits

May 24, 2011

Do you volunteer your time to a charitable or other nonprofit organization? Make sure the organization is aware of this May federal reporting requirement. Nonprofit organizations that may not have been required to complete a return in the past – such as those with less than $50,000 of annual gross receipts – are now required to file Form 990-N.

The form, called an “e-Postcard,” must be submitted electronically. This year the due date for nonprofits with a December 31 year-end is May 16. Failure to file Form 990-N could result in loss of tax-exempt status.

For more information or filing assistance, contact our office.

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How to respond to an IRS notice

May 20, 2011

Letter writing may be a dying art, but official correspondence still arrives in the daily mail -including notices from the Internal Revenue Service.

If you receive one, here’s what to do.

* Scan the heading. The first line, generally printed in bold type and centered beneath your name and address, will tell you why the IRS is contacting you. For instance, the notice might be informational, such as an explanation that your payroll tax deposit and reporting responsibilities have changed. In that case, you simply need to comply with the new requirements.

Questions about missing information, additional taxes owed, or payments due mean you’ll want to take prompt action to avoid more notices or assessments of interest and penalties.

* Review the discrepancy. You’ll find the tax form and the year to which the notice applies printed in the upper right corner. Pull out your copy of the corresponding tax return, along with the supporting documents, and compare what you filed with what the IRS is questioning.

* Prepare your explanation. Are the proposed changes correct? Did the IRS misapply a payment? Whatever the issue, there’s usually no need to file an amended return. However, the IRS typically wants a response, either by phone or mail, in order to clear the notice from your account.

* Do not delay. Ignoring IRS correspondence will not make it go away. Reply to the IRS in a timely manner even if you don’t have all the information they are requesting.

Please contact us as soon as you receive a notice from the IRS or state or local taxing authorities. We’re here to set your mind at ease by answering your questions and helping you resolve the matter as quickly as possible.

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Nonprofit organizations may have tax obligations

May 17, 2011

If you’re an officer or on the board of a community organization, you may wonder about the tax requirements that apply to your group. Generally, an organization will not owe taxes if two things are true:

* It has registered as an exempt nonprofit organization with the IRS, and

* It has no business income from activities unrelated to its exempt purpose.

Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group’s existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000 don’t even have to register to be considered exempt.

More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization’s exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn’t pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.

Once it’s registered, an exempt organization will have to file an annual information return on Form 990 or 990-EZ unless its yearly gross receipts do not exceed $50,000. Those exempt organizations with receipts of $50,000 or less must still file an annual return electronically on Form 990-N. Just as with a tax return, there are penalties for filing Form 990 or

990-EZ late or failing to file. There is no penalty on an organization that is required to file Form 990-N but fails to do so; however, if an organizations fails to file an annual return for three consecutive years, its exempt status is revoked.

Generally, the filing deadline is the 15th day of the fifth month after the organization’s year-end. For 2010 returns, the deadline for calendar-year organizations is May 16, 2011. For assistance with this or any of your tax filings, contact our office.

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Unemployment benefits: Are they taxable?

May 13, 2011

Unemployment compensation can provide a welcome buffer while you’re transitioning to a new job. But with the help comes a tax effect, because the benefits provided under federal or state laws are usually includable in your income in the year you receive them.

As a result, depending on the amount of unemployment benefits you expect to receive, you may want to complete Form W-4V, Voluntary Withholding Request, to have federal income tax withheld from your benefits. The withholding rate is generally 10%. You can also ask the unemployment office to withhold state income tax.

Alternatively, you can adjust or begin making quarterly estimated tax payments.

The amount of unemployment compensation you report on your income tax return is also affected by benefits you have to repay. If you receive and repay benefits in the same year, you can subtract the repayment from the total you received. However, if you make repayments in a year following the receipt of the benefits, the tax treatment depends on how much you repay, and can be claimed either as an itemized deduction or a credit against your current-year tax.

Please contact us if your employment situation changes. We can help with tax and benefit related issues such as severance pay, retirement account rollovers, and deductions related to job hunting.

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IRS raises threshold for imposing tax liens

May 10, 2011

The IRS recently announced that it will moderate its use of tax liens to collect back taxes. A federal tax lien gives the IRS a claim on a delinquent taxpayer’s property for unpaid taxes.

This change means the IRS won’t use a tax lien unless at least $10,000 in back taxes is owed; the previous threshold had been $5,000.

In addition, the IRS says it will “withdraw” more tax liens once the back taxes have been paid. A withdrawal removes the lien from the taxpayer’s credit record, whereas a lien “release” as previously used left the lien on the credit record for at least seven years.

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“Tax Freedom Day” came later in 2011

May 6, 2011

“Tax Freedom Day” fell on April 12 in 2011, three days later than in 2010. According to the Tax Foundation, all the money earned by taxpayers in the first 102 days of 2011 will go to pay their federal, state, and local taxes.

Another statistic from the Tax Foundation: If the government were to collect enough taxes to fund all spending for 2011 (with no deficit), Tax Freedom Day would be May 23, 2011. That’s

41 more days of work to provide the additional $1.48 trillion of revenue needed.

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New law repeals the expanded Form 1099 reporting rules

May 3, 2011

On April 14, 2011, President Obama signed legislation – the “Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011″ – repealing expanded reporting rules for businesses and landlords that had been created by laws passed in 2010.

* Business reporting. The Form 1099 reporting rules were changed by the 2010 health care legislation. Under the “Patient Protection and Affordable Care Act of 2010,” every business, charitable organization, and governmental unit was required to file a Form 1099 for payments to any vendor or supplier of goods or services (other than a tax-exempt organization) totaling $600 or more for the year. Both the vendor and the IRS had to receive a copy of the Form 1099. These rules were scheduled to take effect for payments made after December 31, 2011.

Before the passage of the health care law, payments to corporations were generally exempt from the Form 1099 reporting requirements. The law just signed by President Obama completely repeals this expansion of business reporting requirements, and the reporting rules return to what they were before health care legislation.

* Rental property reporting. Similarly, new Form 1099 reporting requirements were recently imposed on landlords. Under the “Small Business Jobs Act of 2010,” owners of rental properties were generally required to file a Form 1099 for rental-related payments to any provider for services totaling $600 or more for the year. These reporting rules were to be effective for payments made after December 31, 2010.

The new law repeals these expanded Form 1099 reporting rules for landlords. As with the repeal for business reporting, it’s like the requirements never existed. Repeal of the expanded business and rental property expense reporting rules will eliminate a flood of paperwork for most small business and rental property owners.

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