Hopefully, you have been doing the responsible thing and putting away a nice little nest egg in retirement plans such as pensions, profit sharing plans and individual retirement accounts (IRAs). If you did, resist the urge to take money out of those accounts before your turn 59½. For starters, the money you withdraw will be taxable to you. Additionally, it is subject to a 10% early-withdrawal penalty. It’s an IRS “red flag” to forget to include that 10% penalty and increases your chance of an audit.
There are some exceptions to this early-withdrawal penalty. The penalty does not apply if you are disabled, distribution is due to the taxpayer’s death, or benefits are paid out as an annuity over the remaining life expectancy. It also does not apply to IRS withdrawals for educational expenses, certain home-buying expenses, and unreimbursed medical expenses in excess of 7.5% AGI.
People often ask me how long they need to hold on to tax returns and related documents. The hoarder in me says to keep them forever- just incase! But the IRS says that you really only need to hold onto tax return and supporting documentation (like W-2s, 1099s, deduction receipts) for three years after the date of filing (April 15th or later if you filed an extension).
There are a few exceptions to this though. If you under reported your income by 25% or more the IRS can look back six or even seven years. And if you don’t file a return or file fraudulent returns then there is no statute of limitations so the IRS can come after you at any time!
Can’t stand the clutter? You don’t have to hold onto paper records. The IRS will accept digital copies. I keep my important records in Dropbox.
I find this shocking. If the government wants to know where to focus IRS audit efforts it should take a look at the earned income credit program. I’m sure there are plenty of needy people who benefit from the program, but the abuse is outrageous.
“In all, the IRS said it wrongly distributed as much as a quarter of Earned Income Tax Credit (EITC) payments, to the tune of between $11.6 billion and $13.6 billion, according to Treasury’s inspector general for tax administration. Between 2003 and 2012, the IRS erroneously paid out at least $110.8 billion and as much as $132.6 billion, the new report says.”
If you make quarterly estimated payments, the fourth payment for 2012 is due today, January 15, 2013. If you need a voucher and instructions for filing estimated tax payments they can be downloaded from the IRS website here. Filing estimated tax payments helps you avoid those late payment penalties and interest that are calculated when you file your return.
Have you ever gotten one of those ominous looking envelopes from the IRS? Even as a seasoned CPA when one of those IRS envelopes shows up at my front door I feel my pulse quicken. And if you don’t know what I am talking about, consider yourself lucky!
I have recently seen a shocking number of these “CP2000 notices,” indicating some kind of error that is resulting in you needing to make an additional payment. Sometimes it works out that you get an extra refund, but not often! What happens is this:
You submit your tax return to the IRS, the good tax-paying citizen that you are, usually in an electronic format.
The IRS takes the information you submit.
The IRS takes the information the payers submit. This includes W-2, 1099-MISC, 1099-INT, 1099-DIV, etc.
The IRS compares the two sets of information.
Something does not match properly and the CP2000 is sent to you.
This is where it is great to have a CPA that you work with because we are unphased by these letters. Often I find the IRS is wrong. Sometimes it is so wrong that it is clear that no human actually looked at the report before sticking it in the mail. Most times I can write a polite letter to the IRS and have the matter resolved quickly.
The lessons here? First- DON’T PANICK! Second- don’t ignore the IRS letter- give it to your CPA. Third- if you dont’ have a CPA, get one!