Here are seven basic recommendations for keeping tax documents both individuals and small businesses can follow:
If you miss the April 17 deadline to file your tax returns, you have some options, but act quickly to stop the mounting IRS penalties and interest associated with non-filing. Get tax relief now from a tax attorney or certified tax resolution specialist who can guide you through the morass of daunting IRS regulations, rules, protocol, and paperwork to find the best solution to your IRS tax problems.
Like clockwork, about a week or two after the April 17 tax deadline, I begin fielding taxpayer questions regarding what tax documents to keep and for how long.
- W-2 and 1099 forms
- Bills, credit cards, and other receipts
- Invoices, mileage logs, canceled, imaged, or substitute checks, proofs of payment
- Other records to support deductions or credits you claim on your return
- Taxpayers that are foolish enough to under-report more than 25% of their gross income will need to keep those records for six years because the statute of limitations is extended. Important note: Under-reporting income creates unnecessary tax issues especially since the IRS has hired more agents to go after missing back taxes with a vengeance. It’s best to play it safe and report ALL income.
- Anyone foolish enough to file a fraudulent return or not file at all must hold onto those tax records indefinitely because the statute of limitations never expires and eventually the IRS will request for them. As recommended, it’s just easier to file properly.
- For property deductions such as depreciation, amortization, or depletion, those records should be kept for as long as the property is owned. Documents to hang on to include: deeds, titles, and cost basis records, and if special credits and deductions are claimed, keep those records for no less than 7 years.
- Have employees? Keep all employee records including in-home employees for at least 4 years after the date the payroll taxes become due or paid. These records will be handy should you ever face an IRS audit. Forms to save include W-2 and W-4, and all related pay information including benefit forms.
- Keep tax records organized! Last-minute scrambling to organize documents is a waste of time. Organized record keeping will require some work but well worth the effort should need to present your books to the IRS. Saving your receipts will ensure you have a backup for justified deduction claims. Rule of thumb: when in doubt, save.
- Use technology to your advantage; store tax documents electronically! The IRS has accepted scanned receipts since 1997 but you must ensure the following:
- That scanned or electronic receipts are as accurate as the paper records
- That scanned records can be properly indexed, stored, preserved, retrieved, and reproduced should you need to produce a hard copy form. A previous blog post discusses the benefits of storing important documents electronically.
Important point: Make sure that you check with your tax professional before getting rid of important records. If you get a green light from your CPA and your files are really, really old, don’t just shred, create art out of them.
Expiration of Back Taxes: Statute of Limitations on IRS Collections
The IRS is not allowed by law to collect expired past-due taxes. In general, the IRS has ten years from the date of assessment (which is usually close to the filing or audit assessment date) to collect back taxes. By performing a Collection Statute Expiration Date (CSED) analysis, a CPA, Certified Tax Resolution Specialist, or attorney can assist you in resolving your back taxes and other IRS issues. Tax pros can determine when you will be released from this obligation.
This is accomplished by obtaining and analyzing your IRS Tax Transcripts and Account Records. When the expiration date approaches, it is often in the consumer’s best interest to “do nothing.” Due to the numerous exceptions and obstacles that can arise, you will need the assistance of an expert to guide you through this process.
A tax professional can help you determine if you qualify for this form of tax relief by obtaining and analyzing your IRS tax transcripts and records of account.
Tax professionals have literally saved our clients millions of dollars simply by advising and strategizing with them to wait out the 10-year expiration date, especially if it is approaching. If you know how to use it, this is a fantastic tax relief tool. In most cases, they can also obtain a Certificate of Lien Release (if a tax lien was filed) at the same time, giving your credit score a chance to recover.
The IRS generally has 3 years, from the date a return is filed to Audit that return. For example, if you file your 2012 return on August 7, 2017, the IRS has until August 7, 2020, to audit that return. If the IRS determines that you had a 25% understatement of income in a given year under exam, they can go back and audit the last 6 years!
If the IRS alleges fraud or criminal activity, the statute is open indefinitely. The IRS can go back as far as they like in this case.
IRS Collection of Back Taxes
The IRS has ten years from the date of assessment (which is usually near the filing date) to collect all taxes, penalties, and interest from the taxpayer. After the 10-year period has passed, the taxpayer owes nothing to the IRS.
This rule, like all IRS rules, has exceptions. Here are some examples:
- If the taxpayer agrees in writing to allow the IRS more time to collect the tax by signing a waiver
- If the taxpayer files bankruptcy during the 10-year period
- If the taxpayer files an offer in compromise during the 10-year period
- If the taxpayer files an application for a taxpayer assistance order (Form 911-ATAO) during the 10-year period
- If the taxpayer timely files a Request for a collection due process hearing (Form 12153-CDP) during the 10-year period.
In all of these cases, the IRS’s collection period is extended beyond 10 years for a specific period of time.
Taxpayers approaching this 10-year deadline should request copies of their IRS transcripts to confirm the assessment date, allowing them to accurately calculate when the 10-year statute of limitations to collect will expire.
- If the IRS is attempting to collect a tax liability that has expired under the 10-year statute, then the taxpayer must inform the IRS in writing that they no longer have the right to collect this tax liability.
- If the taxpayer is correct, the IRS will write off the tax liabilities which have expired.
One of the services tax professionals provide is called a Collection Statute Expiration Date (CSED) Tax Transcript Analysis. Tax professionals obtain special records of your account that the IRS has on your behalf. They analyze these to inform the client if the 10-year CSED has, or when it will expire. If it has expired the IRS writes off (reduces it to $0.00) whatever the balance is for that particular year. The IRS will NEVER inform you when the 10 years are up. They will continue to send you invoices and collect on the debt. It is up to the taxpayer to prove to the IRS that the 10-year CSED has in fact expired. The IRS is barred, by operation of law, from collecting on an expired debt.
Finding Tax Help for IRS Tax Debt
Tax day is approaching and Americans like never before, are burdened with tough economic realities that include IRS tax debt they simply can’t pay. Some believe if they do nothing, these tax issues will go away. Wrong! Tax debt only grows larger and more stressful over time if not properly dealt with. By not filing a tax return or responding to IRS communication, you could be putting your assets in jeopardy and facing one or more of the following actions:
- Stiff penalties and fines can grow over 25% of the original amount due.
- The IRS filing a tax return for you takes fewer deductions and raises your tax liability.
- A levy placed on wages or bank accounts or a federal tax lien against your property
While these actions seem severe, they become a reality if you decide to do nothing. It’s best to understand your options and handle tax issues sooner rather than later. Here are two tax strategies that can resolve your tax troubles for good:
If you owe less than $10,000 in back taxes:
- File any delinquent taxes and send a check along with the return for partial payment even if you only have $5. This effort will go a long way to stop the “failure to file” penalty clock accruing interest and shows the IRS a willingness to take care of your tax liability. Key point: proactive taxpayers often have an advantage over inactive ones.
- Set up a suitable monthly IRS payment plan by contacting the IRS directly. Note: Your IRS record must be clean and all previous returns filed to participate. If so, it’s guaranteed, that they must work with you. Arrange a payment plan for 36 monthly installments, but make sure the amount you negotiate is manageable.
- Use the IRS website for information. This newsletter, IRS Newsletter Ten Tips for Taxpayers Who Owe Money to the IRS lays out information about the proper forms to complete, payment options, and what to do if you need additional time.
If you owe $20,000 or more in back taxes:
- Contact a Certified Tax Resolution Specialist or a tax attorney who will assess your individual situation, and help to increase your chances of qualifying for tax relief by participating in the following: (if applicable)
- An IRS payment plan that helps settle your back tax debt for the lowest possible amount.
- The removal of bank levies, tax liens, or wage garnishments.
- Offer in Compromise program that if you qualify, can significantly reduce your tax burden and get you back in good standing with the IRS.
Negotiating the vast sea of IRS regulations, rules, protocol, and paperwork, can be daunting for most taxpayers and best left to the professionals who successfully deal with tax issues like yours on a daily basis. The right certified tax resolution specialist or tax attorney will work hard to find the best solution to your problem and ensure you don’t pay a dime more than you have to.