Tax Deadline: Getting ready for next year

Two veteran CPAs share tips about what to do to get, keep taxes in order

By Gordon Oliver, Columbian business editor

Published:

 

Did you know?

• Number of taxpayers who've filed by April 6: 96.6 million

• Number of electronic filings by April 6: 86.1 million

• Electronic filings by tax professionals: 52.7 million

• Self-prepared electronic filings: 33.4 million

• Total refunds: 77.8 million

• Average refund: $2,755

IRS notices

The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS office.

Here are eight things to know about IRS notices and letters.

• There are a number of reasons why the IRS might send you a notice. Notices may request payment, notify you of account changes, or request additional information. A notice normally covers a very specific issue about your account or tax return.

• Each letter and notice offers specific instructions on what action you need to take.

• 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 to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

• If you do not agree with the correction the IRS made, it is important to 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 of the notice. Allow at least 30 days for a response.

• 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 of the notice. Have a copy of your tax return and the correspondence available when you call to help the IRS respond to your inquiry.

• It's important to keep copies of any correspondence with your records.

• IRS notices and letters are sent by mail. The IRS does not correspond by email about taxpayer accounts or tax returns.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process.

Time is just about out for filing this year's federal income tax return without a penalty. Procrastinators should head to the post office or push the "send" button on that computer before tomorrow night's midnight hour.

But even if you're one of those last-minute filers, it's never too early to take steps that will make next year's date with the tax collector a bit easier.

Weary tax accountants who work day in and day out with taxpayers know the trouble spots. They include inadequate record-keeping on business expenses; incomplete or nonexistent receipts for charitable donations; and a lack of awareness that many of their interest income and payment expenses must be retrieved from the Internet rather than the mailbox.

John Caton and Mark Bacon, who both work at Day, Bacon, Smith & Co. PLLC in Hazel Dell, took a break from their busy tax-season schedules to offer some suggestions to taxpayers as they think about next year's tax deadline. Their strongest recommendations: keep good records and, if you operate a small business, make sure you hire a good bookkeeper.

"If people would get their information together as they go along, it would be much easier at the end of the year," said Caton, who is easing toward retirement after decades as a tax accountant. "When we sit down with people to go through their tax return there wouldn't be a hole in the information."

Both men find their work of sorting through the web of changing lives and evolving tax rules to be constantly rewarding and challenging. Their work reflects the ebbs and flows of the economy and of social mores. They see marriages and divorces, new babies and adult children returning home to live, foreclosures and inheritances.

"Sometimes we know more about what people are doing than their clergyman does," Bacon said, not entirely jokingly.

In the realm of public policies affecting tax law, change is in the air. Washington voters last year legalized same-sex marriage. That doesn't immediately affect federal tax filings because the tax code doesn't recognize such marriages, although a U.S. Supreme Court ruling on the subject could lead to federal recognition of those marriages. Washington residents also voted in 2012 to legalize production and consumption of marijuana for recreational use. Again, state law is in conflict with a federal prohibition against marijuana, and no one knows how that conflict will sort out.

Among the potential issues: how does a business that sells marijuana take a business expense deduction if its product remains illegal under federal law? The company's income would be taxable, even if the product is illegal, but expenses wouldn't be deductible.

"That's going to be very interesting," Bacon said. "I suspect that in the coming years we'll have seminars about this."

Such issues will affect few of the taxpayers who use the services of accountants like Bacon and Caton. For more typical taxpayers, the men offer the following key suggestions:

• Record-keeping: Get your documents in order, including interest payments and earnings that you may need to pull off a website. You'll reduce errors, bullet-proof yourself against an audit, and possibly cut your tax liability.

• Mileage: Keep a log of your auto travel for reimbursement. If your employer pays less than

the federal allowance (currently 56.5 cents per mile), you can deduct the difference as a business expense. Bacon and Caton advise employers to make direct reimbursements for mileage rather than providing a flat mileage allowance, which increases payroll taxes both for companies and employees.

• Cellphones: The IRS now says that you can deduct costs if a cellphone is primarily used for business, instead of requiring a percentage breakout of personal use. One quirk: It's tougher to claim a business exemption for cellphone costs if you don't have a landline or other second phone for personal use.

• Charitable deductions: Always get a receipt. If a single donation exceeds $250, make sure the receipt notes that you received no goods and services in exchange for your contribution. Without that statement, the IRS is likely to reject the donation. And, those pennies or dollars you toss into the Salvation Army kettle aren't deductible -- from a tax standpoint, it's better to go home and write a check.

• Donations of goods: If you donate your vehicle to charity, you're allowed a deduction only for the amount that vehicle was sold for. Rules are a bit looser for donations of clothing, furniture, and other household items to a charitable store such as Goodwill. Donors can deduct a "thrift store value" -- a general estimate of what those items sell for in a thrift store. Bacon and Caton advise listing the donated items on the tax receipt you receive when making a donation, and even taking photos of donated items for your records.

• Adult family members in residence: Bacon, who has worked in Portland, Maine and other areas, says he's seeing more multigeneration families in a single household than ever before. He attributes the change to the difficulties many young people face in finding jobs with enough pay to establish a household. Head-of-household taxpayers may take deductions for expenses of dependent residents, such as disabled adults, but not for adults who are not dependents. Modest payments by household members to cover expenses are considered cost-sharing, not income. But if family members pay a market-rate rent, especially if they live in a portion of the house with its own entrance or an auxiliary building, you could end up with taxable income.

• Bookkeeper: Bacon and Caton urge small businesses to make sure they use a well-qualified and competent bookkeeper. They suggest asking bookkeepers for references and examples of their work. Poor bookkeeping, they said, ends up costing business owners more money than necessary at tax time. "A lot of times there needs to be a lot of work on our part, and the client wonders why their bill is so much higher," Bacon said. "Anybody can be a bookkeeper, and some people should not be."

Elsewhere in today's issue, the Internal Revenue Service also offers advice for taxpayers who are ready to look ahead now in order to make life easier a year from now.

Keeping good records

Here are five tips from the IRS about keeping good records.

• Normally, tax records should be kept for three years.

• Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

• In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.

• Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

• For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Make tax filing easier

Here are tips from the IRS on things you can do now to make next April 15 easier.

• Adjust your withholding. Use IRS's Withholding Calculator at www.irs.gov or Publication 919, How Do I Adjust My Tax Withholding?

• Store your return in a safe place.

• Establish a central location where everyone in your household can put tax-related records all year long.

• Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items.

• If you use a tax professional to help you strategize, plan and make financial decisions throughout the year, then search now. Choose a tax professional wisely.

• If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions may pay off.

• Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through www.irs.gov or IRS2Go, the mobile app from the IRS.

Amended tax return

Here are eight key points the IRS wants you to know about when considering whether to file an amended federal income tax return.

• Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended income tax return.

• Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. An amended return cannot be e-filed; you must file it by paper.

• Generally, you do not need to file an amended return to correct math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS normally will send a request asking for those.

• Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

• If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS campus. The 1040X instructions list the addresses for the campuses.

• If the changes involve another schedule or form, you must attach that schedule or form to the amended return.

• If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.

• If you owe additional 2011 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.