Janell A. Israel & Associates

 1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817

 

May 2009 Tax Newsletter

 

 

 

What's new in taxes:  

 

IRS Gives Up On Private Debt Collection

 

The use of private debt collection agencies to collect overdue taxes was started in 2006.  Some in Congress have agitated for an end to the program from its very beginning.  Now, after an extensive review of the cost-effectiveness of the program, the IRS announced that it will not renew contracts with the private agencies.

 

Instead, the IRS plans to hire an additional 1,000 collection personnel in 2009.  The Commissioner stated that collection work is best done by IRS employees who, in these troubled economic times, have more options in dealing with taxpayers struggling to meet their tax obligations.

 

How long should you keep tax records?

Tax records should be kept year-round, not hastily assembled just for your annual tax appointment.  But which records are important, and how and why do you keep them?

 

Without tax records, you can lose valuable deductions by forgetting to list expenses on your return or having substantiated items disallowed if you’re audited.

 

Generally, returns can be audited up to three years after filing.  However, if income is under-reported by more than 25%, the Internal Revenue Service can collect unpaid taxes up to six years later.  In other words, you need good records to verify what you report on your tax returns.

 

Another money-saver:  If your records are organized, your accountant will need less time to review your records.  This may translate to lower tax preparation fees.

 

-WHICH RECORDS ARE IMPORTANT?

 

          -Records of income received

          -Expense items, especially work-related expenses

          -Home improvements, sales, and refinances

          -Investment purchases and sales information

          -The estate value of inherited property

          -Specific uses of loan proceeds

          -Medical expenses

          -Charitable contributions

          -Interest and taxes paid

          -Records on nondeductible IRA contributions

 

How should you keep your tax records?  Any way that is convenient for you that will allow you to give complete information on each item:  How Much?  What For?  When?  Where?  Why?

 

RECORDKEEPING FOR BUSINESSES

 

The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.

 

What records?  All businesses should have a permanent set of books which summarize individual deposits, disbursements, and items of adjustment.  These records should be retained indefinitely.   Permanent records also include those needed to prove the basis (cost) of depreciable assets.

 

Supporting documents may be needed to validate the journal entries if your returns are examined by the IRS.  The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year has passed.

 

The supporting documents the IRS reviews include bank statements, cancelled checks, payroll records, invoices, and the like.  You should also retain supporting deposits which do not reflect income, such as loan documents.  If storage is a problem, consider microfilming these documents.

 

What happens if your records are inadequate?  If you fail to retain adequate records to support the items claimed on your returns, the IRS has authority to reconstruct your income using one of several methods, including estimating increased net worth, looking at bank records, or estimating the raw materials used in manufacture.  Whatever method the IRS uses, you have the burden of proof if you dispute their estimate.  Without adequate records, proving the IRS estimates wrong is difficult, at best.  You could end up with an assessment for additional taxes, plus penalties and interest.

 

For additional information and recordkeeping suggestions which will fit your financial world, call us.

 

HOW LONG SHOULD RECORDS BE KEPT?

 

Just how long you should keep records is partly a matter of judgment and a combination of state and federal statutes of limitations.  Federal returns can be audited for up to three years after filing (six years if underreported income is involved), so all records substantiating tax deductions should be kept at least that long.

 

Here are recommended retention periods for various records:

 

RECORDS                                                    RETENTION PERIOD

 

-Cancelled checks                                        7 years

-Credit card receipts                                    7 years

-Paid invoices                                              7 years

-Bank deposit slips                                       7 years

-Bank statements                                        7 years

-Tax returns (uncomplicated)                       7 years

-Tax returns (all others)                               Permanent

-Employment tax returns                             7 years

-Expense records                                         7 years

-Financial statements                                  Permanent

-Contracts                                                   Permanent

-Minutes of meetings                                   Life of company plus 7 years

-Corporate stock records                              Permanent

-Employee records                                       Period of employment plus 7 years

-Depreciation schedules                               Life of assets plus 7 years

-Real estate records                                     Ownership period plus 7 years

-Journal & general ledger                             Life of business plus 7 years

-Inventory records                                       7 years

-Home purchase and improvement records   Ownership period plus 7 years

-Investment records                                    Ownership period plus 7 years

 

Requirements for computer-maintained records are generally the same as for manually kept records.

 

What's New in Finances:

 

Credit Card Companies Trim Rewards

 

The economic downturn has claimed another casualty:  the rewards programs offered by credit card companies.  Used to encourage credit card holders to charge purchases, these programs offered cash rebates, airline tickets, and other freebies for each dollar charged.

 

Now banks are struggling to remain profitable and are cutting back on their rewards programs.  Airlines, too, are trimming their free mileage programs by raising the number of miles required to qualify for free tickets.

 

If you use a credit card that offers rewards for purchases charged, be aware of these changes. You might want to monitor your rewards more carefully than in the past and cash them in before they expire or stricter redemption rules are put into effect.

 

 

 

Put Your Tax Refund To Good Use

 

Did you recently receive an income tax refund?  Here are some suggestions for making the most of it.

 

* Pay off consumer debt.  This is generally one of the best uses for extra cash.  For example, if you typically carry a credit card balance and pay 16% interest, you'll realize a 16% return if you pay off that debt.  You probably won't save quite as much by paying off other types of loans, but you should consider that as well.

 

* Contribute to an individual retirement account (IRA).  A contribution to an IRA is a good idea whether it's tax-deductible or not because IRA earnings grow tax-deferred.  If you're self-employed and show a profit for the year, you can also make a tax-deductible contribution to a Keogh plan.

 

* Start or add to an education fund.  Consider investing your extra money for your child's education. We can help you decide whether your education fund should be held in your name, your child's name, or in trust.  We can also make sure that you don't get snared by the "kiddie tax."

 

* Invest in yourself.  While planning for your family's education, don't forget yourself.  Have you put off training for new job responsibilities or a new career because you couldn't afford it?  Now that you have some extra cash, spending it on yourself may be the best investment of all.  You also may be entitled to a tax deduction for education expenses that are required by your employer or that improve the skills required on your current job.

 

Don't just spend a tax refund; put it to work improving your financial well-being.

 

 

 

Take a Break

 

A history lesson…

 

Maybe if we did a better job of listening, history wouldn't have to repeat itself.

 

 

The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Janell Israel & Associates and NPC are separate and unrelated companies.

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