Preparing tax forms is a job few individuals or business owners enjoy.
Yet, once a year, like clockwork, we have to do it. Some people put it off so long
that they find themselves applying for
extensions every April. That may be as
much a problem of lack of preparation as it
is procrastination — and it can be avoided.
All taxpayers have to do is prepare adequately for the inevitable form filing by
keeping careful records all year, and their
tax tasks will be less onerous. The filing
process will flow along more smoothly,
and careful preparation may help taxpayers avoid penalties and audits.
Smart Business spoke with Steve Gross,
a principal with Skoda Minotti, to get a few
tips on what tax records to keep, in what
form they should be kept, how long they
should be retained and how taxpayers will
benefit from staying ahead of the game.
How do taxpayers benefit from keeping and
organizing records for tax purposes?
Careful record keeping simplifies the
tax return preparation process. The more
organized a taxpayer is, the less time it
takes to prepare the returns, and the less
costly it becomes for people who work
with tax preparers. Remember, the longer
it takes to prepare a return, the more
money it is going to cost to have it prepared. That applies to individuals and
business owners alike because, as the
adage goes, ‘Time is money.’
What types of records should taxpayers
retain from year to year?
One key document is last year’s return
and the information it contains. This is
helpful for individuals and tax preparation professionals who can use them as
a guide for this year’s forms. On the
income side, you should keep 1099s
that show dividend and interest earned
as well as brokerage statements. W-2
forms provided by your employers not
only reflect income but also federal,
state and local taxes withheld. If you
invest in partnerships or S corporations, you should retain the K-1s reflecting your share of income and deductions. On the deduction side, you
should keep 1098 forms that reflect
interest paid to banks as well as real
estate taxes. You should also keep outof-pocket medical receipts, college
tuition receipts and employee unreimbursed business expenses.
Should taxpayers keep records of donations
to charitable organizations?
This is a hot topic. For calendar years
beginning in 2007, no deduction is
allowed for contributions of cash,
checks or other monetary gifts, regardless of the amount, unless the donor
maintains either (1) a bank record, such
as cancelled checks or (2) a receipt, letter or other written communication form
the donee. Contributions of $250 or
more must be substantiated by written
acknowledgement from the charitable
organization. There are other special
rules for non-cash contributions, such as
clothing and furniture, in excess of $500,
and more stringent rules relating to the
donation of used vehicles to charity. You
may want to seek the advice of a tax professional in these cases.
Is the manner in which tax records are kept
and stored important?
Most importantly, organize the data and
store your tax records in a safe place. In
the event you receive the dreaded letter
from the IRS that you have been selected
for audit, not only will you save time but
any anxiety that you may have will be
reduced knowing you have the records
they request. For the current year’s taxes, I
suggest a file folder or large envelope to
keep receipts received during the year.
This makes it easy to gather the date needed in order to prepare the tax return.
What consequences might befall taxpayers
who don’t keep accurate tax records?
Tax authorities may disallow deductions
during an audit if the proper documentation is not available to them. This would
include such items as rental property
expenses and unreimbursed employee
business expenses. This will cause additional taxes due as well as penalties and
interest. This also may cause an agent to
decide to audit a previous or subsequent
year. Another reason for keeping accurate
tax records is that this ensures all income
has been reported and that no deductions
have been omitted.
For how long should taxpayers keep records?
I tell clients to keep their tax records
for a minimum of four years and a maximum of six years. Generally a tax return
is open for audit by the Internal Revenue
Service for three years from the original
due date of the return or the date it was
actually filed, whichever is later. An
exception to the general rule stated
above is if a taxpayer omitted 20 percent
or more of his or her income. Then the
tax return would be open for audit for a
period of six years.
STEVE GROSS is a principal with Skoda Minotti, which is based in Mayfield Village, Ohio. Reach him at (440) 449-6800
or [email protected].