Keeping & Destroying Records

Keeping Old Tax Records

Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed.

It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. 

However, the statute of limitations for many states is one year longer than the Federal. The reason for this is that the IRS provides state taxing authorities with Federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments.

In addition to lengthened state statutes clouding the record keeping issue, the Federal 3-year rule has a number of exceptions:

• The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
• The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn't file a return; (b) files a false or fraudulent return in order to evade tax, or (c) deliberately tries to evade tax in any other manner.
• The IRS gets an unlimited time to assess additional tax when a taxpayer files on an unsigned return.

If no exception applies to you, for Federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.

Examples: Sue filed her 2010 tax return before the due date of April 18, 2011. She will be able to safely dispose of most of her records after April 18, 2014. On the other hand, Don filed his 2010 return on June 1, 2011. He needs to keep his records at least until June 1, 2014. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.

Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property transactions, social security benefits, etc. You should keep certain records for longer than 3 years. These records include:

• Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
• Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after final sale.
• Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.

BUT IN A THUMB NAIL

•        Tax Returns should be permanent records including W-2(s)
•        The backup for tax returns can be destroyed after 6 years.
•        Purchase & investment information for stuff you still own should be kept for 6 years AFTER you dispose of it.
• Stock Purchase Records
• Home improvements & purchase records
•        If NOT a part of your business or tax return  the following can be destroyed after one year.
• Utility Bills & Checks
• Gasoline receipts
• Grocery receipts
• Credit card statements
• Etc. 

         

PBGC settlements

Many of the retired UAL pilots are receiving settlements from the PBGC which include (1) notification of increase of monthly benefit and (2) a lump sum notification which will be a single retroactive payment of the past 68 months since the bankruptcy.

Rollover to IRA account: The lump sum may be sent to your regular IRA rollover account without paying tax on that amount at this time. To avoid the current tax you must fill in the form provided by the PBGC and have the funds sent directly to your IRA account by the PBGC. There is not an age limitation for rollovers to IRA's from another IRA or from a qualified plan

THIS IS USALLY MY RECOMMENDATION.

Simple IRA: The 'Simple IRA' mentioned in the PBGC material is a highly restrictive employer plan NOT to be confused with a traditional IRA or a Roth IRA. You may roll your lump sum payment into either of the latter vehicles - a Roth IRA will cause you to pay the tax on the amount of the lump sum distribution.

Roth IRA: A Roth IRA is an after tax retirement vehicle. Simply stated it is a promise by the government that if you pay the tax now you won't have to pay it later. A traditional IRA states that you do not have to pay the tax now but you - or your heirs - will pay the tax later.

A basic fundamental when using a Roth IRA is that if you will be in a higher tax bracket later than you are now, a Roth may be appropriate. There are several instances in which a Roth may be right for you, however, our experience shows there are very few.

Rollover not offered: Apparently there is a threshold in which the PBGC is not offering a rollover option. As I get more information I will post it here.

Final Determination reports that owe money: There are a couple of reports that some pilots owe money rather than getting additional amounts. It is my understanding that there may be an error of what was reported to the PBGC by UAL because of a earlier computational problem having to do with ERISA. There seems to be a group working on this problem. Some information is available at http://www.rupa.org/

PolitiFact | 2011 W-2 tax forms and HR 3590: No, you won't have to pay taxes for health insurance

PolitiFact 2011 W-2 tax forms and HR 3590: No, you won't have to pay taxes for health insurance

4 Facts You Need to Know about E-mails

There are many email scams circulating that fraudulently use the Internal Revenue Service name or logo as a lure. The goal of the scam – known as ―phishing‖ – is to trick you into revealing personal and financial information. The scammers can then use your personal information – such as your Social Security number, bank account or credit card numbers – to commit identity theft and steal your money.

Here are four things the IRS wants you to know about phishing scams:

1. The IRS does not send unsolicited e-mails about a person’s tax account or ask for detailed personal and financial information via e-mail.

2. The IRS never asks taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

3. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site,
 Do not reply to the message.
 Do not open any attachments. Attachments may con-tain malicious code that will infect your computer.
 Do not click on any links. If you clicked on links in a suspicious email or phishing Web site and entered confidential information, visit IRS.gov and enter the search term 'Identity Theft' for more information and resources to help.

4. If you receive a suspicious e-mail that claims to come from the IRS, forward that email to phishing@irs.gov and then delete the message after forwarding.

Brokerage 1099 Statement SNAFU's

As you are well aware many brokerage houses have gone out of business and/or merged into others. In some cases others have changed companies that handle their dividend distributions and also names have been changed. Pershing handles the distributions for many investment companies and multiple 1099's are not uncommon.

All of this means you may get 2 1099's instead of one from the same company. For instance:

• Vanguard Brokerage switched from Pershing in the middle of the year. (This
  does not affect mutual funds)
• Bank of America took over Countrywide
• Chase tookover Washington Mutual
• Wells Fargo tookover Wachovia
• Smith Barney dropped the name Citi and added Morgan Stanley

California Use Tax Issues & Responses

Why we are asking this question in your organizer. Why it is necessary for you to answer the question.

California requires taxpayers to pay use tax (sales tax) on items purchased out of state that are brought into California and first used in California.

This has always been California law but until the Internet, the amount was probably negligible. Now, however, it is one of the predominate ways to purchase items and California wants it's tax. They have made this perfectly clear by incorporating the collection of this tax by incorporating it into your non-business tax return. (Business returns have a different procedure.)

The line item has been on the CA 540 tax return since 2003. The CA Board of Equalization (the enforcement and collection arm for sales/use tax) is continually finding more and more ways to enforce this law. Those in business are getting letters - audits going back 8 years is possible.

Please answer the question in the organizer and if the answer is YES please send us a list itemizing your out of state purchases.

2010 Haiti Relief Contribution Deductible for 2009

Charitable Haiti Relief Contributions made before March 1, 2010 are deductible on your 2009 tax return according to a law passed by Congress. H.R. 4462 is expected to be signed by the President. This contribution is retroactive to any Haiti contribution made after January 11, 2010.

For those of you who used technology to make your contribution via a text message your telephone bill showing name, date, and amount will serve as substantiation.

States, such as California, who must pass conforming legislation have not had a chance to do so yet but we understand it is in progress.

If you have, or intend to make, a Haiti charitable contribution and are going to deduct it on your 2009 tax return please make a special note of it in your organizer or send us an e-mail.