Record Keeping

After you file your taxes, you will have many records that may help document items on your tax return. You will need these documents should the IRS select your return for examination. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.

The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS can assess additional tax. Returns filed before the due date are treated as being filed on the due date.

	IF you…	THEN the period is…
1	Owe additional tax and (2), (3), and (4) do not apply to you	3 years
2	Do not report income that you should and it is more than 25% of the gross income shown on your return	6 years
3	File a fraudulent return	No limit
4	Do not file a return	No limit
5	File a claim for credit or refund after you filed your return	The later of 3 years or 2 years after tax was paid.
6	File a claim for a loss from worthless securities	7 years

Should I Panic if I Receive an IRS Notice?

Should I Panic if I Receive an IRS Notice?

NO!!! Each year, the IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many can be dealt with simply and painlessly. Here are some tips:

1. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice will likely cover a specific issue about your account or tax return and provide specific instructions on what you are asked to do to satisfy the inquiry.

2. If you receive a correction notice, you should review the correspondence and compare it with the information on your return. If you agree with the correction, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

3. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

4. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help them respond to your inquiry.

What are your chances for being audited?

IRS 2010 Data book was issued and provides statistical data on its fiscal 2010 activities.  The data book provides some clues for your chances of an audit.   There were 142,823,105 individual tax returns were filed (October 2, 2009 to September 2010) and 1.1% or 1,581,394 were audited in 2010.  Of the total audited returns 473,999 or 30% were returns with earned income tax credit (EITC).  Only 21.7% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners; the bulk of the audits (about 78.3%) were correspondence audits. 

A correspondence audit is the lowest level of auditing performed by the IRS and they are performed by mail.   The IRS computers examine the information in there computers to the information received from third parties.  If the information does not match the IRS typically requests additional information regarding a specific item or issue on the tax return.  The correspondence audit can typically be resolved by replying by the dates on the letter.

Following are selected audit rates for individuals not claiming the EITC:

• Business returns (excluding farm returns) showing total gross receipts of $100,000 to $200,000, 4.7% of returns were audited in FY 2010, up from 4.2% in FY 2009.
• Business returns (excluding farm returns) showing total gross receipts of $200,000 or more, 3.3% of returns were audited in FY 2010, versus 3.2% in FY 2009.
• Returns showing total positive income of $200,000 to $1 million, 2.5% of returns not showing business activity were audited, and 2.9% of returns showing business activity were audited; for FY 2009, these percentages were 2.3% and 3.1% respectively.
• For FY 2010, the audit rate for returns with total positive income of $1 million or more was 8.4%, a substantial increase from the 6.4% rate in FY 2009.

The audit rates for business returns were as follows:

• Corporate returns other than Form 1120S, 1.4%, versus 1.3% for the year before.
• Small corporations with total assets of: $250,000 to $1 million, 1.4%; $1–$5 million, 1.7%; and $5–10 million, 3%. For FY 2009, the percentages were, respectively, 1.3%, 1.8%, and 2.7%.
• Large corporations with total assets of $10 million or more, the overall audit rate was 16.6%, up from 14.5% for FY 2009. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.4% for those with total assets of $10–$50 million (up from 10.1% for FY 2009); 16.1% for those with $250–$500 million (versus 15.8% for FY 2009); 45.3% for those with $5–20 billion (down from 48.7% for FY 2009), and 98% for those with $20 billion or more (down from 100% for FY 2009).
• Partnership and S Corporation returns, the audit rate was .4%, the same as for the year before.

Math errors on individual returns accounted for roughly 10.5 million notices that IRS sent out relating to the 2009 return, 60.8% were a result of the making work pay credit.

• 9% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax),
• 4.9% related to exemption number/amount,
• 4.4% related to the EITC,
• 4.1% related to the standard/itemized deduction,
• 13% related to the first-time homebuyer credit.

FY 2010 penalty assessments:

• 57.3% for failure to pay
• 27.3% for underpayment of estimated tax
• 13% for delinquency.
• 42.1% of these assessments for businesses were either failure to pay or underpayment of estimated tax.

The IRS initiated 4,706 criminal investigations in FY 2010.

• 3,034 referrals for prosecution and 2,184 convictions.
• 81.5% of the sentences were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof).

 Source: RIA Checkpoint and IRS 2010 Data Book.

The Economy and Employee Theft

When the economy takes a dip, business owners often see a spike in employee theft. Small business owners tend to be particularly susceptible. Many accounting software applications have a tool that, with minimal effort, can help you spot problems. Take a close look at your vendor list and the dollar amounts spent with them over the last six months. Look for any vendors you don’t recognize and see if you find a trend in the changes to the amount spent with those vendors. The check register also offers a good tool for evaluation. Look at vendor names and see if checks have been written on a regular schedule. For example, while rent, telephone and electric bills are monthly, cleaning and other services may be weekly. If you notice a change in the frequency of payments or that a vendor’s name appears more often than it should, take a closer look.

2011 Offshore Voluntary Disclosure Initiative

The IRS is offering people with undisclosed income from offshore accounts an opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through Aug. 31, 2011.

This is the second special disclosure initiative for taxpayers with foreign accounts. Since the first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009, more than 3,000 taxpayers have come forward with bank accounts from around the world. The new initiative will allow these tax payers to participate.

The new initiative includes a higher overall penalty structure for 2011, meaning that those who did not come forward in 2009 will not be rewarded for waiting. However, the 2011 initiative does add new features.

The new penalty framework requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy related and/or delinquency penalties.

A new penalty category of 12.5 percent was created for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

Write-off for Heavy SUVs Used Entirely for Business

Under the 2010 Tax Relief Act, the bonus first -year depreciation percentage is 100% (instead of 50%) for bonus-depreciation eligible “qualified property” that is generally (1) placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and (2) acquired by the taxpayer after Sept. 8, 2010 and before Jan. 1, 2012. Qualified property includes autos and trucks which are 5-year MACRS property and thus qualify for bonus depreciation. For example, a taxpayer buys and places into service a new $50,000 heavy SUV on October 1, 2010 and uses it 100% for business, may write off its entire cost of $50,000 on his 2010 tax return.

Taxable or Non-Taxable Income?

There are situations when certain types of income are only partially taxed or not taxed at all. Some examples of non-taxable Income are:

1. Adoption expense reimbursements for qualifying expenses,

2. Child support payments,

3. Gifts, bequests and inheritances,

4. Non cash employer gifts (holiday turkey),

5. Workers’ compensation benefits,

6. Meals and lodging for the convenience of your employer,

7. Compensatory damages awarded for physical injury or physical sickness,

8. Welfare benefits,

9. Economic recovery payments, and

10. Cash rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

1. Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds which were paid to you because of the insured person’s death are not taxable unless the policy was turned over to you for a price.

2. Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

3. Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

Tax Refund Options

In an effort to help individuals build their savings and retirement funds, a new direct deposit option in 2010 allows taxpayers to use their tax refunds to purchase U.S. Series I Savings Bonds. Additionally, a new debit card option has been added as well.

• Using Direct Deposit—You can deposit your entire refund into one account or split it into three different accounts. Starting this year, taxpayers may also use the split-refund option to purchase Treasury I Bonds using Form 8888, Direct Deposit of Refund to More Than One Account.

• Buying Savings Bonds- New for 2010, you can request a portion of your refund be used to buy up to $5,000 in low-risk, liquid Treasury I Bonds, which earn interest and protect owners against inflation. Ask your Padgett office for more information.

• Debit Card Program for Expedited Refunds—This new pilot program is designed to provide 600,000 electronic refunds to low and moderate income taxpayers via MyAccountVisa Prepaid Debit Cards. The Treasury will mail letters to certain individuals inviting them to acti-vate a card in time to have their 2010 refunds deposited to the card.

Should I File a Return?

You do not have to file a tax return in all cases, but there are some instances in which you still should file, even if it is not expressly required. You should file if any of the following apply:

1. Did you have Federal Income Tax withheld from your pay? – You should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Do you qualify for the Making Work Pay Credit? – You may be able to take this credit if you had earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

3. Do you qualify for the Earned Income Tax Credit? – You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund.

4. Do you qualify for the Additional Child Tax Credit? – This refundable credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

5. Do you qualify for the American Opportunity Credit? – The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.

6. Did you buy your first home? – If so, you could qualify for the First Time Home- Buyers Credit. The credit is a maximum of $8,000, or $4,000 if your filing status is married filing separately. To qualify for the credit, taxpayers must have bought, or entered into a binding contract to buy, a principal residence on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010.

Delayed Filing for Some Taxpayers

Due to Congressional action at year-end, taxpayers will need to wait to file until middle to late February if any of the following three categories apply:

Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, as well as, state and local taxes and the state and local general sales tax deduction. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file.

Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.

Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.