The Documentation Must Haves – Guilty until proven innocent
The Documentation Must Haves – Guilty until proven innocent
Taking valid deductions on your tax return is your right. Defending your deductions is becoming harder and harder to do. Read this to make sure your deductions rule the day.
When faced with questions on your tax return deductions, it is getting all too common for tax authorities to deny everything and then make you prove that your deductions are valid. Do not let this happen to you. Here are some suggestions.
The one-two punch. To prove your deduction most auditors are looking for two key documents. Miss one of the two and your deduction will evaporate like smoke at a campfire.
- Receipts. This is the first of the sure-fire two things you must have to validate a deduction. The receipt should clearly show the company or entity, the date, the value of the activity and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.
- Proof of payment. This is the second of two sure-fire things you must have to validate a deduction. You will need a canceled check, a bank statement or a credit card receipt and related statement.
Contemporaneous. Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.
Other proof. In addition to the above, there are certain deductions that require additional documentation. Here are the most common;
Mileage logs. You will need to show properly maintained mileage logs for business miles, charitable miles and any medical mile deductions.
Business records. You will need financial statements for any business related activity with supporting documentation.
Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings.
Proof of non-reimbursement. If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses are not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers and anyone who uses their own tools to do their job for their employer.
IRS Gets Transcript Service Back On-line – Be prepared for more security hurdles
IRS Gets Transcript Service Back On-line – Be prepared for more security hurdles
After being off-line for over a year, the IRS recently announced the reactivation of their popular ”Get Transcript” service. Here is what you need to know.
A year ago the IRS closed down their popular “Get Transcript” online service after a severe security breach. With new security protocols now in place, this IRS service is available once again. Here is what you need to know.
Background. Last spring the IRS announced their “Get Transcript” online system had been compromised. The nature of the break-in suggested that thieves did not “hack” the system. They were able to get past security with identity information stolen from other sources. The IRS closed the service until the system could be better protected.
How used. Use this online system to obtain summary information of your tax records. Many use the service to verify current and prior year income for student loans, mortgages, and e-file verification.
The new 2-step. The new security will now entail a 2-step authentication process to log into the “Get Transcript” service. When you wish to log-in, the IRS will use email and/or text messaging to send you a one-time use code to enter the system. Without this additional code you will be denied access.
The MUST HAVES. To access the new online feature you must have:
- An email address
- A text-enabled mobile phone
- Confirming financial account information (credit card number or loan numbers)
Give up more identity to get more security? While this extra security measure will make the system harder to breach, it is requiring you to give up more of your private information to the government. This means the IRS will now have your cell phone number, email address, and specific financial information. Given the track record of IRS systems, some may hesitate to provide this additional information.
Other options are available. Unfortunately, everyone must re-register to use the system. This includes those who have used the old system successfully. If you have problems using the newly enhanced security features you can still request your information via mail or online ordering. The IRS anticipates response time for these requests to be approximately 10 days so please plan accordingly.
Tips to Organize Your Tax Records
Tips to Organize Your Tax Records
If your tax records are a bit of a mess, here are some ideas to help to get better organized.
The time to organize your tax records is now. Waiting until the end of the year or, even worse, waiting until you are audited can lead to headaches. Here are some tips to get on top of your tax records.
Storage Hints
Organize your records by tax year. At the start of each year create the current year’s files. Here are some filing suggestions.
- Tax return and support. Create a file with copies of your signed tax return(s) for the year. Include any support documents provided with your filed tax return.
- Files in tax return order. Create your annual files to match the flow of your 1040 tax return. Here are some suggestions.
- Income. Copies of W-2s, 1099s, Social Security statements, interest income, K-1s, and investment activity go in this file.
- Charitable Donations. Create a separate file for cash donations and one for non-cash donations. Include a copy of your charitable mileage log in this file.
- Medical and Dental. Create a file for all your medical related expenses. Include a copy of your medical related mileage log in this file.
- Other itemized deduction file. In this file include all other proof of itemized deductions. This includes tax statements, mortgage interest, state income tax documentation, casualty and theft loss information and unreimbursed business expenses.
- Business activity. Have a file for each hobby and business activity. Include a copy of your business mileage log in this file.
- Education. Create a file for all documents related to educational expenses. Include in it copies of invoices, tuition and fees. Include invoices for music lessons, instruments and any materials required to purchase for your student.
- Other. Put all your miscellaneous receipts into this file. This includes receipts you are unsure about. Include receipts for daycare, educational expenses, dues, unreimbursed business expenses and any other tax related items.
- Statement file. Sort all your statements by vendor, then by month. Create a separate file for these statements. This can include bank statements, credit card statements, and investment account statements. Consider creating a digital back up copy of these statements and store them on a CD or USB drive.
The Digital Alternative
If more of your records are in digital format, consider creating a tax folder for each year on your computer and then place your digital records into sub-folders using the same sort as noted above. Create password protection for each folder.
Rotation idea
Finally, at the end of each tax year place a note on the tax return to confirm the date your tax return was sent into the federal and/or state government. Note on the outside of this file when you can toss the support documentation. Go back to old tax years and shred the old documents that are no longer needed. Do not take this action unless you know the length of time you will need to save these records.