How to Easily keep Tax Records for as long as you need them. And be ready anytime for the Inquiring Mind of the IRS. The IRS has more than one employee. They have more than one division. Do they have more than one mind? They do have one mission. The mission of the Examination Division is to determine if the correct amount of tax was paid. When it comes to your tax returns, IRS has certain requirements. My Top 5 Tips are simple. Here is a recap of the 5 tips I gave you in my last blog of 2014.

Keep your copies of your tax returns FOREVER. ..
The Internal Revenue Service has THREE YEARS time to examine your tax records. This is called the Statute of Limitations for examination or audit. ..
Your state has MORE time. Arizona has ONE more year. California has TWO more years. Which state are you in? How much longer do they have to look at your tax records? ..
For calendar-year tax return items, you must keep your records AT LEAST five years. But some records need to be kept even longer. ..
Don’t be in too big a hurry to get rid of the paperwork. Keep the original documents. Scan them. Use a cross-cut shredder to really destroy the no-longer needed documents.

Now, I’ll share HOW to easily use a multi-drawer cabinet. Once you design your own system, it will save you time, money and tax headaches…

A plastic cabinet is convenient, but not secure like a locking cabinet. How many drawers does it have? Have one drawer for each of the 5 prior years plus a drawer for the current year. Permanent files will take up more space over time, so you may want a more secure place for your long-term permanent file. …
Label the drawers 2015 (current paperwork for the coming year.) 2014, 2013, 2012, 2011 and 2010 for the years still open for audit. Look at the date you filed your 2010 tax return. Count forward five years to determine when (what date) it is actually safe for you to begin shredding. …
In each of the 5 years’ drawers keep your tax return for that year. Keep a small box for your income records, your expense receipts and records of anything you sold in that year. …
Keep a file of paperwork related to assets or investments you still own. You will use this “basis” information In the year you sell an asset or investment. It will help your determine the gain or loss on the sale. In the year of sale, that paperwork will go into that year’s tax box.Because state returns are generally based on the federal return, keep the IRS return and the state return’s documents together. …
Save the tax returns in your permanent drawer. Shred the documents that are related to items only pertinent to a single year’s tax return for which the statute of limitations has already expired. For 2010 returns timely filed in 2011, the IRS statute “tolls”, or expires, in year 2014. The Arizona statute for 2010 returns runs out in 2015. The California 2010 tax return expires in 2016.

… If you have been flirting with tax evasion or tax fraud, the IRS has more than three years to look at your return. They have FOREVER to look at a fraudulent tax return. You be the judge. Let your conscience be your guide. Stay out of tax jail. Be honest with yourself and on your tax return. Have a happy year!

Welcome to the tax year home stretch

By Nellie Williams on

December 11, 2014

- IRS Audit, IRS Audit Help, IRS Audit Process, IRS Tax Problems, Tax Audit, Tax Audit Help

This is NOT the 7th inning stretch that we are so familiar with in baseball. We are rounding third base and running home in the last month of the last quarter of this calendar year. Will you be the winner in this tax game for 2014? Will the IRS be the winner when they select tax returns for examination? Did you realize that the returns the IRS will be selecting in 2015 will not be the 2014 tax returns. Most of the tax returns they will be selecting tax in 2015 will be tax returns for the year 2013. Do you know where your 2013 tax return is? Do you have a method for saving the records you used for that prior year’s return? Do you know how long to keep those records? The answer to these big questions is just one of the areas I cover in my Audit Proofing Coaching program available in January. First enjoy your holidays. Then we can get to work to protect you from a tax audit. Your 2013 tax return is also the starting point for preparing your 2014 tax return. What do you want to make sure you finish before December 31st? Here are THREE TIPS direct from the Internal Revenue Service for Individual Retirement Accounts. “1. Know the limits. You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. In some cases, you may need to reduce your deduction for traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level. You have until April 15, 2015, to make an IRA contribution for 2014. “2. Avoid excess contributions. If you contribute more than the IRA limits for 2014, you are subject to a six percent tax (emphasis, mine) on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2014 tax return, including extensions. “3. Take required distributions. If you’re at least age 70½, you MUST take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2014. That deadline is April 1, 2015, if you turned 70½ in 2014. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax (emphasis, mine) on the RMD amount you failed to take out. If you turned 70½ in 2014 and delay your first annual RMD until the year AFTER you turn 70½, you must take that first RMD by April FIRST, 2015 (not the fifteenth) PLUS you must take the 2015 annual RMD before December 31, 2015. Watch the timeline to avoid the penalties and make the most of your retirement savings.

Your Rights as a Taxpayer, Part Three

By Nellie Williams on

November 25, 2014

- IRS Audit, IRS Audit Help, IRS Problems, IRS Tax Problems, Tax advisor, Tax Audit Help

Young Woman On The Telephone And Computer

Today I will finish the second half of what we might call the IRS Taxpayer Bill of Rights. They call it the Declaration of Taxpayer Rights. If you want to see the IRS Mission Statement, go back to the earlier two articles on this topic. I became The IRS Insider based on my personal experience as an income tax auditor. The IRS is a BIG organization. My perspective is limited to the Examination and Appeals Divisions. I have colleagues who help me and help you with the Collections side of the big tax machine. Remember, every employee of the government is a person, an individual with a job to do. Are they just like you? Does one of you throw your weight around? Can you follow the Golden Rule and still protect yourself? Yes, I believe you can. The Golden Rule is NOT “He who has the gold, rules.” The Golden Rule is NOT “Do unto others before they do unto you.” The Golden Rule is “Treat others the way you would like to be treated.” You can always catch more flies with honey than you can with vinegar. The very next right is all about the gold, IRS Collections.

“5. Payment of Only the Correct Amount of Tax. You are responsible for paying only the correct amount of tax due under the law — no more, no less. If you cannot pay all of your tax when it is due, you may be able to make monthly installment payments.

“6. Help With Unresolved Tax Problems. The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS. Your local Taxpayer Advocate can offer you special help if you have a significant hardship as a result of a tax problem. For more information, call toll free 1-877-777-4778 (1-800-829-4059 for TTY/TDD) or write to he Taxpayer Advocate at the IRS office that last contacted you.

“7. Appeals and Judicial Review. If you disagree with us about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. You may also ask a court to review your case.

“8. Relief From Certain Penalties and Interest. The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. We will waive interest that is the result of certain errors or delays caused by an IRS employee.”

Often I quote Justice Learned Hand, judge of the US Court of Appeals, who said,

“Anyone may arrange his affairs so that his taxes shall be as low as

possible; he is not bound to choose that pattern which best pays the

treasury. There is not even a patriotic duty to increase one’s taxes.

Over and over again the Courts have said that there is nothing sinister

in so arranging affairs as to keep taxes as low as possible. Everyone

does it, rich and poor alike and all do right, for nobody owes any

public duty to pay more than the law demands.”

Your Rights as a Taxpayer, Part Two

By Nellie Williams on

November 19, 2014

- IRS Audit, IRS Audit Help, IRS Audit Process, Tax advisor, Tax Audit, Tax Audit Help

Last week I began the conversation saying, “When you are being audited you might not realize that you do have rights as a taxpayer.” And You DO! We all do. The mission of the Internal Revenue Service is to “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” I became The IRS Insider based on my personal experience as an income tax auditor. The IRS is a BIG organization. My perspective is limited to the Examination and Appeals Divisions. I have colleagues who help me and help you with the Collections side of the big tax machine. When you are in the audit “hot seat” you may not feel it is fair for you to be there, but the IRS just has unanswered questions based on the tax return you filed. Below, is the IRS Declaration of Taxpayer Rights, I may comment on one or more of these rights, but will not paraphrase or condense them. I have so much to say about your right to representation that this article is limited to only this one item, Taxpayer Right Number Four.

“4. Representation. You may either represent yourself or, with proper written authorization, have someone else represent you in your place. Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. If you are in an interview and ask to consult such a person, then we must stop and reschedule the interview in most cases. “You can have someone accompany you at an interview. You may make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting.”

Based on my own experience, when a taxpayer wanted to record our interview, it made me even more cautious about what I was saying. That is not to say that I wasn’t careful to speak the truth or to act in a courteous manner without the recording. It meant that as IRS employees, we were less spontaneous. We were more guarded in what we said. Every case that is worked by any IRS employee is subject to review by their division’s review staff. If the reviewer has questions about determinations made, the case can be “kicked back” to the auditor for explanation. If the review staff feels the case has not been developed fully, or worked properly, it will not be closed until the auditor addresses the concern of the reviewer. As the auditor gains experience on the job, the better judgment they develop and the fewer cases are returned by the reviewer. But a random case will still be subject to review at any time in the examiner’s career. When the taxpayer wants to record the interview, they must request this 10 days in advance of the appointment so that the auditor can arrange for their own recording device. The auditor will also have their supervisor, or another auditor, present during this recording. Will you have someone accompany you? Or will you feel outnumbered? Do you want this interview to be the most formal or the most comfortable? I know, it is never comfortable in the audit “hot seat.” Next post I’ll talk about the remaining four taxpayer rights.

Attention Employees

By Nellie Williams on

February 6, 2014

- Tax advisor, Tax Audit, Tax Audit Help

Attention Employees: This is the blog I promised you. . You are required to attach your W2 to your tax return when you file this important once-a-year tax form. Every year you have the chance to “look yourself in the eye” and sign your tax return under penalty of perjury that it is correct and accurate. .. If you don’t already have your W2 for 2013, you should be getting this important form very soon. Employers are required to issue their W2 forms by January 31st. .. Did you move since you were first employed? Does your employer have your correct current address? Did your employer go out of business during the year? Did they pay their accountant in advance to issue the year-end W2 forms? They probably did not. On payday did you get a paystub showing the cumulative, or year-to-date income earned and taxes withheld? Did you keep track of these numbers yourself? Most people won’t but it is a good idea. .. Did you have more than one job during the year? Do you have a W2 from EACH of your jobs? You must report your total income from all taxable sources. What can you do if you don’t have this required for filing form? .. If you have not received your W2 by February 14th, you can call the IRS for assistance. When you dial 1-800-829-1040, be prepared to wait on hold. It could be a long wait. This is a toll-free number and they get a lot of callers. The assistor at the Internal Revenue Service will ask you for your name, your address with zip code and your social security number. (Remember YOU called them. DO NOT (and I MEAN EVER!) give this confidential information to any one who calls you. Protect your identity.) The IRS will also ask for your employer’s name, complete address, phone number and your dates of employment. IRS will contact your employer for you (if that is possible) and will request the missing form for you. Form 4852, Substitute for W2, was designed for just this purpose. When you call the IRS to request their help, they will send you this form. There are blanks for you to fill in your wages and withholdings. It will ask you how you determined the amounts you are entering. It will also ask you to describe what you did to try to obtain your W2. If you did receive a W2, was it correct? If you think it was not correct, contact your employer and request a corrected one, a W2-C. If you filed your tax return using Form 4852 and then received a W2 or W2-C showing different amounts, then you must file Form 1040X to amend your return. This amendment may result in you owing more tax or it may result in you getting a refund. Consult your tax professional for help filing this more complicated form.

Nobody really likes to pay taxes. But who doesn’t like peanut butter?

By Nellie Williams on

November 7, 2013

- Deductions, IRS Audit, Tax Audit, Tax Audit Help, Tax Credit

November is National Peanut Butter Lover’s Month. I grew up on peanut butter and jelly sandwiches. I still have one of these comfort, stand-by sandwiches every once in a while. And I love peanut butter cookies! .. Can you deduct peanut butter? Not if it is just your own, or your children’s meal. And chances are you’re not going to offer a peanut butter sandwich to your business client. But you could decide to serve a fancied up sandwich at a business get-together. Think about a working lunch or a special afternoon tea type theme to your business meeting. .. If you run a sandwich shop, peanut butter can be an ingredient in one of your menu items. If you run a daycare center, you will certainly be serving this staple at lunch. Cookies can become a business gift. And maybe you want to have your clients over for an afternoon celebration. Of course, if your guest list includes someone with a peanut allergy, peanut butter will not be on the menu. But then this peanut butter could be the cause of a medical deduction. So there can be several ways peanut butter and taxes really are related. .. The IRS loves the words “ordinary and necessary”, “generally” and “usually”. To be deductible your meal or entertainment expense must be “directly related to” or “associated with” the active conduct of a trade or business. It can also be for the production or collection of income. It cannot be lavish or extravagant. It must be reasonable considering the facts and circumstances. .. Do you remember the five Ws of journalism? Who, what, when, where, why and then add how much you spent.. Who did you entertain? What did your discuss. When did you have this meal? Where did you go? What was the business purpose or what did you want to talk about at this restaurant? And how much did you spend? Your deduction can include the cost of the food, beverage and tip, but is limited to 50%. The cost of your own meal at a restaurant is not deductible. Meals with coworkers or business associates are not deductible unless you can show a clear business purpose. .. You must show that the main purpose for this meal or entertainment was for business; that you engaged in business during this meal or activity. You must also have more than a general expectation of receiving income or some other specific business benefit in the future. .. Instead of “directly related”, where you discuss business over a meal, your business discussion can be “associated with” the meal or entertainment. How much talking could possibly go on during a concert, at the theater or at a rousing sporting event or a backyard bar-b-que? If you are entertaining at your home, be sure to have a guest book for your records. Have each of your guests sign in. .. If the business discussion or transaction is substantial (and directly before or after the meal or entertainment) it can be deductible. There is no requirement that you spend more time on business than on the meal or entertainment. .. Employers have exceptions to the 50% deduction limit. If you provide meals to more than half of your employees on your business premises and for your convenience (not the convenience of the employee), those meals are a 100% deductible fringe benefit. Employer provided social or recreational expenses, like a company party or picnic, for the benefit of employees who are not highly compensated employees, are 100% deductible. .. I can’t emphasize enough your need to keep adequate records. This is for your tax audit protection.

Tax Deadlines – One More Down. How many more to you have to go this year?

By Nellie Williams on

October 25, 2013

- Deductions, IRS Audit, IRS Audit Process, IRS Problems, IRS Tax Problems, Tax Audit, Tax Audit Help

We have just passed the October 15th extended deadline to file your income tax return. If you are an individual taxpayer, your next deadline might be the 4th Quarter Estimated Tax Payment which is due before January 15th for the calendar year ending December 31st. .. This can be confusing to a lot of my clients. If you think the January payment is for the current year, you are mistaken. It is for the PRIOR year. Since I work with these overlapping dates more often than you do, I have learned how to keep them straight. But if yours is the only tax return you are responsible for, these dates are often confusing. .. Who pays an estimated tax payment? Most wage earners get a paycheck. The money you take home is your “net check” after deductions are taken out. The basic deductions from most paychecks are for social security. medicare, federal and state income taxes. .. You may have income on which there is no withholding. What kinds of income might that be? Interest and dividend income, rental property profits, sales of assets, gambling winnings, spousal maintenance (otherwise known as alimony) just to name a few. .. Remember, as an American you are taxed on your worldwide income and every dollar is taxable unless it is specifically excluded. Some of the income that is not taxable includes child support, some inheritances and gifts you receive. There could be others, but I try to keep the length of these blogposts or articles to a pleasantly readable size. .. So, back to estimated tax payments. They are designed to help you pay the tax you estimate you may be liable for. The Internal Revenue Services wants you to pay this tax money evenly throughout the tax year. Taxes withheld from your paycheck are considered paid evenly through the year, even if they fluctuate from payday to payday. .. Small business owners generally do not take a paycheck. They figure their profits and make estimated tax payments to cover their income tax and their social security tax. Their tax for the year is figured when the tax return is completed. .. Estimated Tax Payments are made in four payments on Form 1040ES. The first quarter is composed of months January, February and March. The first quarter (Q1)1040ES is due April 15th. The second quarter (Q2) is for months April and May (only two months here). Q2 1040ES is due June 15th. The third quarter is back to three months, June, July and August. with the Q3 1040ES payment due September 15th. And the fourth quarter, Q4, is the FOUR months of September, October, November and December. The 1040ES for Q4 is due January 15th of the following year. You just tell me how much you paid and when. .. It is okay to make these estimated tax payments early. If you make the payments late, the late payment penalty is figured when preparing your 1040 tax return. If you did miss a payment this year, don’t panic. Just be prepared to add a few extra dollars (depending on the amount of your estimated tax payment) to your tax bill when your tax return is prepared.

Adjusting Your W2 Income Tax Withholding

By Nellie Williams on

May 2, 2013

- Charitable Giving, IRS Audit Help, Tax Audit, Tax Audit Help

how-to-run-a-marathon-finish-it-and-live-to-tell-the-tale

We have just celebrated the end of the “1040 Marathon”. But that does not mean that income tax season is over. Have you filed your return or are you “on extension?” Or maybe you are just going to file your tax return later this year. This blog is “a day late and a dollar short” for filing 2012 tax returns. But it is right on time for 2013 tax planning! Even if you are afraid you will owe tax, I do recommend you file your return before April 15th. Especially if you are going to owe tax. When you owe more than $1000 when you file your return, the Internal Revenue Service will assess you a late-filing penalty of 5% per month. That’s 5% of the tax due. The only good news about this is that the maximum penalty is 25%. Well, 25% of $1000 is $250. PLUS the IRS must charge you interest on top of the penalty. If you think you are going to owe tax and you request an extension of time to file, pay some money with that extension to keep that extension valid. If you don’t pay your tax by April 15th, the IRS must assess that late penalty. Here’s a tip you can start using right away. If you are self-employed it is up to you to estimate your taxes. You make quarterly estimated tax payments. If you don’t pay enough, and you don’t pay enough on the date the quarterly estimated tax payments are due, you can be assessed a late-payment penalty. This is different from the late-filing penalty I talked about earlier. If you are an employee, you should have taxes withheld from your paycheck. That income tax withholding is considered paid evenly throughout the year. If you have more withheld in November and December than in the earlier months, your total withholding for the year is still considered paid evenly all through the year. You can adjust your withholding any time during the year. Does your payroll department restrict how many times they will adjust your paycheck? Just be careful that if you are not taking enough out in the first part of the year, that you don’t run out of paychecks before the end of the year. You want to have enough withheld to make your total enough to cover your tax bill on April 15th. Once January comes around you are already into the next year. You may have other income that is taxable, like interest or dividends, rental income or sale of property. You might want to or need to make estimated tax payments. Estimated tax payments are due April 15th, June 15th, September 15th and January 15th. If you want more information on how to estimate your taxes, shoot me an email. Remember this. Failing to plan is planning to fail. Nobody ever PLANS to pay more than they have to. So keep you eyes open on your own tax situation to keep the IRS out of your wallet. Always to your lowest legal tax, Nellie T Williams, EA

Just In Time Management

By Nellie Williams on

April 17, 2013

- IRS Audit Help, IRS Tax Problems, Tax Audit Help

It doesn’t matter what business you are in. It doesn’t matter if you are in a business at all. We all must practice some kind of time management. I confess. I am a deadline driven woman. And I do practice time management. Sometimes it is “just in time” management. Other people don’t realize they, too, practice “in the nick of time” management. Advance planning is the key to successful time management. As carefully as I plan my tax season, as carefully as I plan my work days, there is always something that pops its head up, like that “whack-a-mole” game in the arcade. Something needs immediate attention. Do you have that in your life? We have just ended another “1040 Marathon.” Just because April 15th is past doesn’t mean it is the end of tax season. My father was proud of me when I told him I was going to leave the Internal Revenue Service and begin my own income tax practice. And then he laughed (not just to himself) when I told him it would be a great seasonal business and I could do other things the rest of the year. He had life experience and he knew better. And I have learned that tax season never really ends. Yes, I filed an extension for myself and for several clients. I encourage clients to bring me their information so I can file their extension before 4/15 and then we sit down together and file their tax return later. As I’ve said in earlier blogs, the extension does not give you any more time to pay your taxes. It gives you additional time to file the information. Years ago I would have said, “file the paperwork”. Now that we file electronically, or e-file, we keep the paperwork and we file the information. What happens if you filed that extension and when you finish your return you see that you owe tax? The IRS will assess interest and they will assess penalties. Interest cannot be waived. The law requires they charge you interest on unpaid or late-paid taxes. The IRS will charge you interest from the date the taxes should have been paid until the date they actually were paid. PLUS they will charge you a late-filing penalty. IRS may also assess a late-payment penalty. This sounds terrible. Is there no end to these “additions to tax”? Actually, there is. The late-filing penalty is 5% per month (or part of a month) with a maximum penalty for late-filing of 25%. On just $100 that 25% is $25.00. On $1000, a 5% penalty is $50 and a 25% penalty is $250. How much will you owe? My advice to you is to file that return as quickly as possible to minimize the penalty. IRS may send you a bill, and you may need to make payments, but you will be stopping that penalty. In a future blog I’ll be sharing with you how to manage your tax payments. This will be good information for those of you who are self-employed. And I will have a secret tip for those of you who are employees. Always to your lowest legal tax, Nellie T Williams, EA

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Easily keep Tax Records for as long as you need them

Welcome to the tax year home stretch

Your Rights as a Taxpayer, Part Three

Your Rights as a Taxpayer, Part Two

Attention Employees

Top 7 Questions to Ask Your Tax Advisor

Nobody really likes to pay taxes. But who doesn’t like peanut butter?

Tax Deadlines – One More Down. How many more to you have to go this year?

Adjusting Your W2 Income Tax Withholding

Just In Time Management