Tuesday, May 7, 2013

The Aftermath of Tax Season & an Update on Record Retention

Three weeks after the filing deadline I still find myself recouping from what has been the most grueling tax filing season of my career. Just when I thought I was mostly back to normal, I discovered during a quick lunch out yesterday, that I put on my shirt inside out and didn't even know it! That has occurred only one other time a couple of decades ago while travelling in the "Tub", our RV prior to The Popeye Express. We were parked at the visitor center at the shore of the Mississippi River in La Crosse, WI, when I went down to watch a boat go through the nearby locks. This is rather slow operation, and afterward as I was walking back towards the Tub I couldn't understand why I couldn't retrieve a tissue I had in my short's pocket. Ducking into the public rest room, I discovered that not only had I put on my pull-on shorts inside out, they were also backwards. Do you think I was a tad tired that morning?

So what was different about filing season 2013? Start with the IRS using their new efiling system. It has been a 3 year phase in, and 2013 was year 4, meaning they couldn't use the old system anymore. This caused delays in both forms being available, the ability to efile, and the ability to retrieve timely acknowledgements. Add to this the requirement that all the software vendors also had to reprogram their software, and most companies decided to "tweak" their programs to further enhance them, and you have a recipe for errors, delays, and whatever else you can think to throw at it. I survived.

In the meantime, a good friend sent me an article titled Never Throw Away Your  Tax Returns which was something I was not anxious to read. I managed to slog through it, and although I can't dispute the author's concerns, for most of us, I feel it is more trouble than it is worth. Why?

1.  Social Security sends out annual reports. If you actually read them when they arrive, you should spot any irregularities in reported wages immediately and contact the SSA to have your records corrected. It makes more sense to me to save your W-2 forms, if you must.

2.  A copy of an old tax return is not the same as a receipt for the purchase of an asset. You should save the receipt for any asset used in business, until the asset is sold, and the statute of limitations on the final tax return where the sale of this asset has been reported.

3.  Almost every state with a state income tax has a minimum filing requirement. As most are indexed for inflation, the amount changes each year. Remember, we are taxed on our source income, not just our state of residence. So, if you have what is called a K-1 form, or a W-2 form for that matter, from another state, you should always check the non-resident filing requirement. Most often you won't meet the filing requirement, but if you do need to file a return, and if you owe tax, most states allow you to take a credit for taxes paid to another state, if your state of residence also taxes you on this income. And don't forget, if state income taxes were withheld on the non-resident state, you will need to file a return to claim a refund.

4.  Again, I really think copies of W-2 forms to prove income are a lot easier to keep than old tax records.

5.  Yes, there are states such as California who when IRA's first became available, allowed a smaller deduction than the $2,000 federal deduction. Conformity finally caught up, but for my clients, I saved just the pages for those years showing the difference in the allowable deduction. This is called your basis, and I hope you have all saved these records.

So what have I been up to since April 15th? I have taken the bull by the horns, and have finally completed the digitizing of all tax records for clients. For me, this has been a 5 year program, as I bought my scanner in 2008, and started scanning in client records since that time. It's been a BIG job, but one finally put behind me. Fortunately my tax software allows me to print pdf copies of returns, so that eliminated a lot of scanning.

In addition to a file for each client for each year since 2008, I also created a permanent file. The permanent file contains items such as the following:

1.  Escrow settlement statements for the purchase of any residence along with investment business real estate.

2.  Escrow settlement statements for the refinancing of all real property.

3.  Copies of tax forms showing the basis for a personal residence when the old law required you to replace a residence within a two year period of the sale and for the same amount or more than the sale of the old residence. Several of my clients still live in these houses, and even though the law is no longer in effect, they still may need to prove their basis in these houses.

4.  Pages one and two of both the federal & state tax return back in the 70's and 80's when CA did not conform to the federal deductible amounts to prove the basis in the state IRA's. 

5.  Anything else I kept in my old paper permanent file such as divorce decrees showing alimony, child support, and absolutely anything else that could effect a future return.

So now I have 3 really big 4 drawer legal size filing cabinets empty, except for the hanging files. They will go up for sale as soon as we return from our trip. If you're interested & have a means to transport them from my southern California office, send me an email with an offer and they may be yours!

As for me, I'm ready to fire up the big diesel in the Popeye Express and hit the road. Thanks to all of you who wrote in questions and voiced your concerns.  Hope to see you at the FMCA International Convention in Gillette WY in mid-June. Look us up if you'll be there!