THE WANDERING TAX PRO
Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 45+-year veteran tax professional Robert D Flach.
Now that you have completed your tax
return – how long should you keep the return, and the records and documentation
that support items claimed on the return?
(1)Keep the paper copy of your tax returns (Form
1040 or 1040A plus all supporting Schedules and Forms) forever.This provides a permanent record of your
financial history.You never know when
the information on a prior year’s tax return will come in handy for a variety
of tax or financial related reasons, or just to satisfy personal curiosity.
(2)Keep all back-up documentation that supports
an item reported or deducted on your tax return for four (4) full years.This includes all applicable bank statements
and cancelled checks as well as W-2s, 1099s, 1098s, and appropriate receipts
and bills.You can toss all such
information for your 2011 tax return in December of 2015.
The IRS, and the appropriate state
tax authorities, has three (3) years from the due date (or filing date if you
had any extensions) of a tax return to audit and revise that return (except in
the case of tax fraud – then the IRS can go back forever).If you filed your 2011 Form 1040 by the
initial April 15, 2012 due date, “Uncle Sam” had until April 17, 2015 to audit
(3)Keep all confirms for the purchase
of stock, bonds and mutual funds, and other appropriate back-up (such as
notices of splits and records of any dividend reinvestments) for as long as you
hold the investment plus four (4) additional years.Keep the confirmation slip or other
documentation for the sale or disposition of the investment for four (4) years
after the sale or disposition.
Similarly, keep all Closing or
Settlement Statements for the purchase and refinancing of real estate, and
documentation of any capital improvements, for as long as you own the property
plus four (4) additional years.Keep the
Closing or Settlement Statement or other documentation for the sale or
disposition of the property for four (4) years after the sale or disposition.
And if you have invested in a
limited partnership or “sub-chapter S” corporation, or are a partner in a business
organized as a partnership, a “sub-chapter S” corporation or an LLC or LLP you
should keep the annual Form K-1 you receive from the investment or business for
as long as you own an interest in the entity plus four (4) additional years,
and keep any paperwork related to the sale or disposition of your interest for
four (4) years after the sale or disposition.
“More than 2 million homebuyers thought they
were getting a great deal when they were offered up to $8,000 in tax credits in
But did the first-time homebuyer tax credit really help
homebuyers? Not really, economist Dean Baker says in a recent study published
by the Center for Economic Policy Research.
The credit mostly helped sellers and banks, as it lured
buyers who ended up overpaying, he says.”
* An automatic
federal extension, requested on Form 4868, is an extension of time to file your return, but not an extension
of time to pay any tax due.The IRS will charge a minor penalty (.5% per
month, or part thereof) and interest on any tax due with the eventual filing of
However, in “IRS Waives Failure to Pay Penalty for Unemployed” FINANCE DIVA tells us that “for tax year 2011 taxpayers who file an
extension can also have an extension to pay and avoid the failure-to-pay
penalty. if they meet certain requirements. According to IRS tax tip 2012-48,
the penalty relief is available to two categories of taxpayers.
■ Wage earners who
have been unemployed at least 30 consecutive days during 2011 or in 2012 up to
this year’s April 17th tax
individuals who experience a 25 percent or greater reduction in business income
in 2011 due to the economy.
In addition to the 2 categories above you must also
meet the following adjusted gross income test and your 2011 balance due cannot
■ Adjusted gross
income must be below $200,000 if Married Filing Jointly or
■ Adjusted grow
income must be below $1000,00 if filing status is single, married filing
separately, head of household, or qualifying widower.
The most important part of this initiative is while the
failure-to-pay penalty is waived, interest will still accrue on any outstanding
balance until paid in full and the amount owed, including interest,must be paid by October 15th, 2012 or all of
the original penalties will be added onto the amount due; including any
* From a recent
BUZZ-like “Tax Roundup” post from Joe Kristan at THE ROTH AND COMPANY TAX
UPDATE BLOG –
“Shares of H&R Block tumbled 16% in
premarket trading Thursday after the tax prep company announced significant
staff cuts and office closings, and projected weaker-than-expected earnings.”
* The NATP’s weekly
email newsletter reported on two recent developments -
“Supreme Court Case on IRS Audits:
Generally, the IRS has a three-year statute to audit a
return; however, this changes to six years if there is a substantial
understatement of income, when 25% of more of gross income is omitted. The
definition of what it means to omit gross income is often up for debate as
shown by numerous tax court cases.
In a recent court case, United States v. Home Concrete
& Supply, the Supreme Court decided that despite overstated basis, the IRS
can only audit the last three years. More details of this case will be featured
in an upcoming edition of TAXPRO Monthly.
Local Lodging Expenses:
The IRS has issued proposed regulations that provide a
safe harbor for taxpayers to deduct expenses for lodging when not traveling
away from home (local lodging). These expenses include local lodging expenses
when considered ordinary and necessary business expenses in appropriate
circumstances. Some of these circumstances include:
• The lodging is necessary for the individual to
participate fully in or be available for a bona fide business meeting,
conference, training activity or other business function.
• The lodging is
for a period that does not exceed five calendar days and does not recur more
frequently than once per calendar quarter.
• If the
individual is an employee, the employee’s employer requires the employee to
remain at the activity or function overnight.
• The lodging is
not lavish or extravagant under the circumstances and does not provide any
significant element of personal pleasure, recreation or benefit.
Review REG-137589-07 for additional examples and
Several readers of my post “A Tax Season Story” have asked me what the CPA missed that would generate such a
large tax liability.
While the IRS has not used the “Three
Year Method” for recovering after-tax employee contributions to a pension plan
for decades, the State of NJ still does.
The instructions for the NJ-1040
tells us - “if you will recover your
contributions within three years from the date you receive the first payment
from the plan, and both you and your employer contributed to the plan, you may
use the Three-Year Rule Method to determine your taxable pension income”.
Under this method you “exclude your pension and annuity payments
from gross income until the payments you receive equal your contributions to
the plan.Until that time, the amounts
you receive, because they are considered your contributions, are not taxable and
should not be reported on your return.”
The taxpayer in the situation had
begun to receive his pension from the NJ Division of Pensions in late 2010.While his after-tax employee contributions
are amortized over an expected life on the federal return, the taxpayer qualified
for contribution recovery under the Three-Year Rule Method on his NJ-1040.
NJ will only treat employee
contributions to a 401(k) plan as pre-tax for state income tax purposes.Because the pension plan from which the
taxpayer was receiving distributions was a 403(b) plan all employee
contributions to the plan were treated as “after tax” for NJ purposes. NJ state wages were never reduced by the
The CPA reported on the preliminary 2011
NJ-1040 the same amount of pension income that was reported on the federal Form
1040.This would have resulted in an
excessive overpayment.The taxpayer was
still working (not for the State of NJ) and his spouse also did, with a much
higher salary, so the exempt pension distribution would have been taxed at a
very high rate.
Included in the taxpayer’s copy of
his 2010 NJ-1040 was a statement from me that indicated his total after-tax
contributions, the amount recovered in 2010, and the carryforward to 2011.The taxpayer provided the CPA was the copies
of his 2010 federal and state returns.
A very expensive mistake!
FYI – the offices of the CPA were in
NJ and not NY.
“Governor Romney would permanently extend all
the 2001 and 2003 tax cuts now scheduled to expire in 2013, repeal the AMT and
certain tax provisions in the 2010 health reform legislation, and cut
individual income tax rates by an additional 20 percent. He would also expand
the tax base by cutting back tax preferences, but has supplied no information
on which preferences would be reduced. Tax provisions in the 2009 stimulus act
and subsequently extended through 2012 would expire. These include the American
Opportunity tax credit for higher education, the expanded refundability of the
child credit, and the expansion of the earned income tax credit (EITC). The
plan would also eliminate tax on long-term capital gains, dividends, and
interest income for married couples filing jointly with income under $200,000
($100,000 for single filers and $150,000 for heads of household) and repeal the
federal estate tax, while continuing the gift tax with a maximum tax rate of 35
The plan would reduce the six current income tax rates
by one-fifth, bringing the top rate down from 35 percent to 28 percent and the
bottom rate from 10 percent to 8 percent. The accompanying repeal of the AMT
would increase the tax savings from the rate cuts—without that repeal, the AMT
would reclaim much of the tax savings.
The plan would recoup the revenue loss caused by those
changes by reducing or eliminating unspecified tax breaks, thereby making more
income subject to tax. Gov. Romney says that the reductions in tax breaks, in
combination with moderately faster economic growth brought about by lower tax
rates, will make the individual income tax changes revenue neutral compared
with simply extending the 2001 and 2003 tax cuts. He also promises that low-
and middle-income households will pay no larger shares of federal taxes than
they do now.”
The item quotes Curtis Dubay of the Heritage
Foundation, "Taxmageddon falls 70 percent on middle and low income
families. That's because 60 percent of the Bush tax cuts were for middle- and
and the Tax Foundation’s Scott Hodge, "No
American will be unscathed at the end of this year.Taxmageddon hits all of us."
the problem, caused, of course, by the idiots in Congress - "Almost the entire tax code has been put on a
year-to-year lease, and in some cases, month-to-month lease, which is no way to
run a tax system".
He also voices the
opinion of many, myself included - "It's
my guess that nothing will happen on any of these issues until after the
Actually I expect
that the idiots in Congress will extend the current Tax Code for one more year.
what contributes to this aspect of tax complexity is the use of the tax law as
a substitute for direct spending programs and use of the IRS as a substitute
for other federal agencies that ought to be charged with administering programs
in their respective areas . . . . .using the tax law and the IRS in this manner is inefficient,
ineffective, and deceptive”.
I was on “hiatus” Joe Kristan filled the BUZZ void with his “Tax Roundup”
series.Check out some of what we both
missed during the season.
* Kay Bell, the
yellow rose of taxes, reminded us that Tax Freedom Day 2012 fell on Tax Day –
the 2012 filing deadline of April 17th – in her post “Happy Belated Tax Freedom Day 2012” at DON’T MESS WITH TAXES.
I forgot to include the following
item in yesterday’s review of the recent tax filing season.
A long-time client, whose returns I
have been preparing since 1984, got married in 2011 to a non-client whose tax
returns had been prepared by a CPA firm.
The couple had given their 2011 “stuff”
to the spouse’s CPA for review, and the CPA generated joint federal and NJ
state tax returns for the couple.
The client asked me to review the
preliminary returns generated by the CPA before finalizing and filing them.
Based on a quick review of the federal
return, and my knowledge of my client’s prior returns (a copy of my client’s
2010 federal and state returns had been provided to the CPA along with the 2011
“stuff”), it appeared that the federal return was ok (I did not verify actual
entries to original source documents such as W-2s and 1099s, nor did I check
the math – I merely reviewed it for “theory”).
However as soon as I looked at the
CPA-generated 2011 NJ-1040 I discovered a glaring error – to the tune of about
me, a previously unenrolled preparer, review the returns generated by a CPA (who
does not have to take a test to verify tax knowledge as I must eventually do)
saved the couple about $1,800.00 in state income tax!
I did not need to enter the
information into a tax preparation software package to find the error – my naked
eyes spotted it right away.
I have been saying for years that I
have found more errors on tax returns, federal and state, prepared by CPAs than
any other category of preparer – including “self-prepared” returns.
Needless to say I felt great
joy!And so did the client and his new
For the first time since I took over my mentor’s tax practice in
the late 1990s I sent less than 30 automatic GD extension requests to the IRS
on April 16th (there were over 60 the first year).Only 29 this year!
Of course there will be the additional half dozen GDEs that I
did not submit myself, but were done directly by the clients, who will contact
me in about 4 or 5 months.
All of the GDEs were submitted either because the client’s
“stuff” was not in my hands by the March 25th deadline, the client
did not send me anything and asked me to file a GDE, or I needed more
information to properly complete the return (i.e. I did not have all the
necessary information in my hands by March 25th).
Quite a few returns, historically extended every year, were
timely filed for a change, and others were started and extended only because of
I dropped the ball in only one instance, putting off completing the
return because of a massive “cut and paste” job for tons of investment
transactions made difficult by missing cost basis info, provided to me by March
25th, and the demands of the new capital gain reporting system.However it was a strategic move – allowing me
the time to complete several timely received returns that would have otherwise
For the first time in years I stopped working on 1040s not because I had run out of steam and
did not have the energy, or inclination, to continue - but because I had done
all I could within the time constraints.I was actually able to complete a few selective returns that had been
received after March 25th.
Was it because of the 3 extra days of this year’s season
(February 29th, April 15th falling on a Sunday, and
Emancipation Day in DC) – or am I just getting more organized, and finally
getting my clients properly trained?
Due to the idiots in Congress’ inability to think or act there
was nothing new in actual tax law – what is taxable and what is deductible – and
no unnecessary processing delays for 2011 returns (except for early returns
filed electronically – more later).The
expiring Bush Tax cuts, the usual extenders, and BO’s American Opportunity
Credit had all been extended through at least the end of 2011 (and most through
2012) in a relatively timely manner.
The major issue of this tax season involved changes in how
certain items of income and expense were reported on supplemental schedules of
the 1040.The major change concerned the
new requirements for cost basis reporting, and the resulting new Form 8949 and
the revised Schedule D.
For tax year 2011 brokers were required to report to client
taxpayers, and to the IRS, the cost basis of most stocks, including foreign
stocks, acquired on or after January 1, 2011 (“covered” securities) on Form
A new Form 8949 was added to report the individual short-term
and long-term transactions in three separate categories – sales where the cost
basis was reported to the IRS on Form 1099-B, sales where the cost basis was
not reported to the IRS on Form 1099-B, and sales that were not reported on a
Form 1099-B.A separate Form 8949 was
required for each of the three categories.The Schedule D served as a summary of the 8949s.
The various brokerage and mutual fund houses all treated the new
Form 1099-B portion of the year-end consolidated tax report differently.
For the most part this new system required some additional time,
but not additional agita.In many cases
the 1099-B reporting was excellently broken down into separate categories of
short-term “covered” (transactions where cost basis was required), short-term
“non-covered”, long-term, and undetermined term.And a gain and loss analysis, with cost basis
for all, or almost all, transactions provided, was also included in the report
in the same format.
In some the 1099-B received by the taxpayer included the cost
basis for all transactions – although you often had to read the fine print to
discover if the cost basis shown had actually been reported to the IRS.
The worst cost basis reporting formats came from Morgan Stanley
Smith Barney and TD Ameritrade, with TD the bottom of the barrel.The 1099-B for these brokerages was not broken
down to list different categories of transactions (as described above).Transactions were listed alphabetically,
regardless of term or coverage, with cost basis information shown only where
MSSB reports included a gain and loss analysis, but it was merely
broken down by short and long term, as had been done in past years.TD did not include a gain and loss analysis
in its consolidated statement.The client
had to go online to generate the analysis, also still in the short or long only
The additional work required for clients of these brokerages was
not so bad with only one or two pages of transactions.But several had multiple (as many as 50)
pages of transactions (can you say “churning”) – making proper reporting much
more difficult and time consuming than in the past.
The new rules also required brokerage or mutual fund houses to
report wash sale adjustments for all “covered” transactions.In thinking about this I wonder if the
issuers of Form 1099-B will be properly treating the previously identified wash
sale adjustments when reporting the cost basis of subsequent sales of the
The also new requirement of credit and debit card merchants and
third-party payers like PayPal to report transactions to the IRS, and to the
recipient, turned out, despite initial concerns, to be a non-issue, as
taxpayers did not have to separately report this income on 2011 Schedules C, E,
F and entity returns.
The only other major reporting change was in the format of Page
1 of the Schedule E (rental and royalty income and deductions).This was a PITA at first (I really saw no
need for the revisions), but I soon got used to it.
There were no major problems within my own practice this
season.My new, faster, laptop, its cable
access, and my copy machine ran smoothly throughout the 2½ months.The printer, while deciding it would only
print colored pages in pink, and the black printing being less than perfect,
did not slow down operations.There were
no issues with my car or any personal concerns to distract and take time away
from the job at hand.And there were no
individual client issues.
Although, for the second year, I was required by federal law to
submit all returns that I “file” electronically, unless the client opts out, I
once again used the ridiculous, but advantageous to me, IRS interpretation of
the word “file” to get “off the hook”.Each
and every client signed the following statement (which I attached to my copy of
the return) –
“My tax return
preparer Robert D Flach has informed me that he may be required to
electronically file my 2011 federal individual tax return if he files it with
the IRS on my behalf.
I do not want to
file my return electronically and choose to file my return on paper forms. My
preparer will not file my return with the IRS. I will file my paper return with
the IRS myself.
I was not influenced
by Robert D Flach to sign this statement.”
With only 8 seasons left I have renewed my vow to never use flawed and expensive tax
preparation software to prepare 1040s – so I cannot electronically submit my
federal returns.I plan to contact Dave
Williams in the near future and recommend having the IRS follow the lead of New
York State and revise the regulation to require only preparers who use tax
preparation software to file all returns electronically (unless the client opts
Speaking of electronic filing, ACCOUNTING TODAY recently reported
“The Internal Revenue
Service delayed tax refunds early this filing season for 7.8 million tax
returns, according to a report by the Treasury Inspector General for Tax
Administration, which also described steep cutbacks in customer service at the
The report, which
provided interim results of the 2012 filing season, noted that taxpayers who
e-filed their tax returns early in the 2012 filing season experienced delays in
receiving their tax refunds due to fraud detection efforts and problems with
the IRS’s Modernized e-File system.”
Since I could not file federal returns electronically my clients
all received their refunds in a timely manner.
I continued to submit NJ state returns via NJWebFile when
possible (and the client does not object).However this system continues to be unavailable for too many returns.
For 2009 NJ-1040s the property tax deduction was limited to
$5,000 (instead of $10,000) for taxpayers (single or married) with income in
excess of $150,000. For 2009 returns one
could not use NJWebFile if the income reported exceeded $150,000.This limitation was removed for 2010 and
subsequent returns, but one still could not use NJWebFile if NJ Gross Income
exceeds $150,000.Idiots are not limited
to Congress.The cafones in Trenton are
apparently too cheap to pay someone to revise the NJWebFile software to fix
this ridiculous restriction.
I had been concerned before the season officially began (for me
February 1st) that the major tax forms (1040, 1040A, Schedules A +
B) were no longer available at local Post Offices – but soon discovered that
the forms were now available (although in a bit less “bulk) at local
libraries.As a pleasant surprise I
found that, while the libraries did not have NJ-1040 forms, they did have New
York IT-201s and IT-203s!
One strange difference this season.The client who is usually the first to meet with
me to drop off each year- a NJ state trooper who usually comes on February 2nd
or 3rd – was the very last to drop off, during the very last week,
this year.He is going through a divorce
and his wife would not give him her tax papers until the very last minute
(filing separately would have been much too costly for the trooper because of
the disparity of individual W-2 income).
As has happened all too often in recent years, several long-time
clients had gone to their final audit in 2011 or early 2012, a few suddenly and
surprisingly.One who will be truly
missed is the husband of a couple whose 1040 I have been preparing since 1984.
So there you have it – the tax season that was.Only 8 more to go!
I welcome fellow professional tax preparer bloggers to share
their insights and comments on the tax season.