Spring Cleaning: When Can You Purge Your Old Financial Records?

Feeling the urge to purge? April 18, 2017, was the deadline for individuals and C corporations to file their federal income tax returns for 2016 (or to file for an extension). Before you clear your filing cabinets of old financial records; however, it’s important to make sure you won’t be caught empty-handed if an IRS auditor contacts you.

For Individuals

In general, you must keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. That means that now you can generally throw out records for the 2013 tax year, for which you filed a return in 2014. In most cases, the IRS can audit your return for three years. You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income.  So, does that mean you’re safe from an audit after three years? Not necessarily. There are some exceptions. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there is no time limit for the IRS to launch an inquiry.

Here are some basic guidelines for individuals.

Completed tax returns.  Many tax advisors recommend that you hold onto copies of your finished tax returns forever. Why? So you can prove to the IRS that you actually filed. Even if you don’t keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records. Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least the three-year period.

Important note: There are some cases when taxpayers get more than the usual three years to file an amended return. You have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

Real estate records. Keep these for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities. To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

IRAs. The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With the introduction of Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.  If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.

Issues affecting more than one year. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards, or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

For Businesses

The record-retention guidelines are slightly different for businesses. Here are the basics.

Employee records. Keep personnel records for three years after an employee has been terminated. Also maintain records that support employee earnings for at least four years. This timeframe should cover various state and federal requirements. (However, don’t throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.)  Timecards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it’s a best practice for all businesses to keep the files for several years in case questions arise.

Employment tax records. Keep four years from the date the tax was due or the date it was paid, whichever is longer.

Travel and entertainment records. For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.

Sales tax returns. State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your tax advisor.

Business property. Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.

Proper Disposal Protocol

Regardless of whether you’re tossing out personal or business financial documents, always shred them thoroughly first. Also, use proper disposal protocol for any computers and other electronic equipment (such as printers and copiers) that may contain financial data. Simply deleting files using File Manager isn’t enough. Unless you use proper disposal protocol, tech-savvy hackers may be able to recreate sensitive data from the device’s hard drive when it was thrown out, donated to a charity, or returned to the lessor after the lease term expired.

@2017

New Overtime Rules Suspended For Now

 Many employers have been wrestling with plans to comply with new U.S. Department of Labor (DOL) overtime rules since last May. That’s when the rules were finalized, with a December 1 compliance deadline. Those new rules included raising the minimum salary overtime exemption to $913 per week from $455. A little more than a week before the deadline for the rules was to take effect, a federal court has issued an injunction, at least temporarily, blocking implementation of the changes. In its decision, the court stated it believes the DOL exceeded its authority in promulgating the rule. In addition, the court said the DOL failed to follow Congress’s intent, which was to reexamine the duties test of the overtime rules, and not to focus solely on the salary level, as the final rules do.

The DOL’s initial response was to state that it “strongly disagrees” with the ruling, and is “currently considering all of our legal options.” A couple of short-term legal scenarios remain possible: The U.S. District Court for the Eastern District of Texas, which issued the ruling, could drop its temporary injunction. Alternatively, the ruling could be kicked up to the local U.S. Court of Appeals, which could overrule or uphold the injunction. But the chances of the appeals court rendering a decision on the issue before December 1 are slim.

What Lies Ahead? 

In the longer term, the outlook is also unclear. It seems unlikely that the Labor Department under the Trump Administration would fight the ruling, though other parties might. Initial analysis of the district court’s decision by Judge Amos L. Mazzant suggests that holes could be poked into the logic that led to his conclusion. At issue is the fact that the National Labor Relations Act, which laid the groundwork for overtime pay, failed to address the need to periodically adjust the salary threshold. However, a provision for adjusting the threshold was incorporated into regulations way back in 1940. Also, while Judge Mazzant took exception to the idea of periodic salary threshold adjustments in the context of exempt status, he didn’t declare that it was invalid with regard to all DOL rules. In any case, employers have several issues to deal with immediately. Those issues vary according to what actions they’ve already taken. Employers that were waiting until December 1 to roll out their plans are in a better position simply to hold tight and act as if the regulations were never issued.

Disruption Issue 

The benefits of a wait-and-see approach are that there’s no disruption to the status quo and, in most cases, there will be no spike in payroll costs. However, that approach may also bring risks, including having to scramble to make adjustments if the regulations ultimately are upheld. That scrambling might involve paying extra wages due to affected employees retroactive to December 1. Another hazard is that employees who have kept abreast of the issue (independently of any statements made by their employers) who were expecting raises or eligibility for overtime pay could be angered that this benefit was snatched away from them. Employers faced with this dilemma will need to weigh their appetite for regulatory risk, the level of financial pain that compliance with the overtime regulations would inflict, and the employee relations considerations.

Some employers have already made their implementation strategy clear to employees. For employers that have announced plans to reclassify some employees from exempt to nonexempt, options include:

  • Giving those employees the choice of whether to become hourly, or remain in salaried status, while cautioning them that they might need to be moved to hourly status in the future, depending on the outcome of the legal battle.
  • Move forward with their conversion to hourly status to avoid possible future disruption if the regulations are upheld.
  • Drop the plan to switch them to hourly status.

Morale Considerations 

If salaried employees had been promised raises to bring them up to the minimum salary threshold (in lieu of moving them to hourly status), dropping plans for those raises could give rise to problems, such as damaged employee morale. Legal issues could also arise, especially if the promised raises have already been granted. For example, employers could run afoul of notice requirements under state or local laws, and possibly violate common law doctrines governing implied contracts. A compromise approach with respect to planned salary increases could be to phase in the increases instead of raising them immediately to the regulations’ threshold level.

If employees have already been moved to hourly wage status to comply with the regulations, before switching them back to salaried status, take a fresh look at the “job duties” test for exempt status. This test has always been in place and was not affected by the federal court’s temporary injunction. Businesses could find themselves in trouble regardless of the outcome of this legal battle if salaried employees have been misclassified for reasons other than failing to meet the minimum wage threshold.

How the issue will ultimately shake out is uncertain, at best. But observers in Washington, D.C., point out that although many members of Congress opposed the regulations as written, they agreed in principle that some increase in the overtime salary threshold was in order. That is, they didn’t reject the DOL’s legal authority to adjust the threshold, as it has done multiple times since the early days of the underlying statute.

Whatever actions, or non-actions employers take regarding the rule, it’s essential to communicate as clearly as possible with employees about the issue. One basic message that would be reasonable would be for employers to explain that they are waiting for more clarity on the legal front before making any big decisions.

@2016

Health Savings Account Limits for 2017

With Health Savings Accounts (HSAs), individuals and businesses buy less expensive health insurance policies with high deductibles. Contributions to the accounts are made on a pre-tax basis. The money can accumulate year after year tax free, and be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term-care insurance.

Participating employers can also contribute to accounts, on behalf of their employees.

Here are the 2017 limits for individual and family coverage, which were announced by the IRS in Revenue Procedure 2016-28. They are determined after the IRS applies cost-of-living adjustment rules, and the changes in the Consumer Price Index for the relevant period.

  • HSA Contribution Limits. The 2017 annual HSA contribution limit for individuals with self-only HDHP coverage is $3,400 (up from $3,350 for 2016), and the limit for individuals with family HDHP coverage is $6,750 (unchanged from 2016).
  • High-Deductible Health Plan (HDHP) Minimum Required Deductibles. The 2017 minimum annual deductible for self-only HDHP coverage is $1,300 (unchanged from 2016) and the minimum annual deductible for family HDHP coverage is $2,600 (unchanged from 2016).
  • HDHP Out-of-Pocket Maximums. The 2017 maximum limit on out-of-pocket expenses (including items such as deductibles, copayments, and coinsurance, but not premiums) for self-only HDHP coverage is $6,550 (unchanged from 2016), and the limit for family HDHP coverage is $13,100 (unchanged from 2016).

For more information about HSAs, contact your employee benefits and tax adviser.

The Benefits of an HSA

  • You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Form 1040.
  • Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
  • The contributions remain in your account until you use them.
  • The interest or other earnings on the assets in the account are tax free.
  • Distributions may be tax free if you pay qualified medical expenses.
  • An HSA is “portable.” It stays with you if you change employers or leave the work force.

Qualifying for an HSA

To be an eligible individual and qualify for an HSA, you must meet the following requirements:

  • You must be covered under a high deductible health plan (HDHP) on the first day of the month.
  • You generally have no other health coverage except what is permitted under regulations. (Exceptions include dental, vision, long-term care, accident and specific disease insurance.)
  • You aren’t enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else’s tax return.

                                                                                                                              — Source: The IRS

©2016

Congress takes first steps to tax reform

Tax reform continues to be highly touted in Congress as lawmakers from both parties call for simplification of countless complex rules, overhaul of tax rates, and more. At times this year, President Obama and Congressional Republicans seem far apart on a way forward, but at similar times in the past, agreements have quickly and often surprisingly emerged, most recently in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). As the November elections approach more closely every passing day, lawmakers from both parties and the President have a short window to agree on tax legislation. The weeks leading up to Congress’ summer recess may be decisive.

PATH Act as path forward

The scope of the PATH Act surprised many Hill observers. Instead of merely extending the so-called tax extenders (including the state and local sales tax deduction, research tax credit, teachers’ classroom expense deduction), Congress voted to make permanent many of the incentives. Although there had been hearings and discussions about permanently extending some of the incentives, the prospect of getting a bill through Congress and to the President’s desk seemed remote right up to December. Behind the scenes negotiations between the White House and Congressional Republicans resulted in the largest tax bill since the American Tax Relief Act of 2012. The PATH Act went far beyond the extenders. It made changes to the rules for IRS administration, real estate investment trusts (REITs), how the Tax Court works, and more.

Passage of the PATH Act shows that another tax bill, possibly an even larger tax reform package, could make it out of Congress before year-end. Speaking in Washington, D.C. earlier this year, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Oregon, suggested such an outcome. “Against all odds, Democrats and Republicans reached a bipartisan agreement on the PATH Act,” Wyden said. “The December agreement (leading to passage of the PATH Act worked out because of the approach members took to the negotiations.” Wyden predicted that lawmakers would use the PATH Act as a “blueprint for broader reform.”

Everything on the table

Almost everything in the Tax Code appears to be on the table at this time. House Ways and Means Chair Kevin Brady, R-Texas, who is a leading proponent of tax reform, in the House has said as much. “Not all deductions and exclusions will stay; not all will go. The question to ask is: how will these policies drive economic growth?” Among the provisions/ideas being discussed by legislators are:

  • Consolidation of the individual income tax rates
  • Enhancing incentives for lower and middle income taxpayers
  • Revising/repealing some of the tax measures under the Affordable Care Act
  • Lowering the U.S. corporate tax rate
  • Consolidating education tax incentives
  • Eliminating/consolidating some energy tax breaks
  • Repealing the alternative minimum tax (AMT)
  • Tweaking the child tax credit, earned income tax credit, child and dependent care credit
  • International tax reform

Reforming the rules for international taxation, such as the complex rules for corporate inversions, transfer pricing, and more, has been of special interest this year to the House Ways and Means Committee. One unanswered question is whether international tax reform can move forward by itself or if proponents need to add “sweeteners” such as expanded tax breaks for lower and middle income taxpayers to win support in Congress. Some lawmakers want to link international tax reform to a cut in the U.S. corporate tax rate. How to pay for any rate cuts also is generating questions and few answers. President Obama has proposed to tighten the international tax rules and use the expected revenue to pay for infrastructure projects, along with reducing the corporate tax rate.

Energy tax measures

Before Congress’ summer recess, a package of energy tax breaks could be approved by the House and Senate. Many of these are temporary incentives that were not included in the PATH Act, such as the special credits for fuel cell vehicles. There appears to be bipartisan support to make permanent some, if not all, of these tax breaks. SFC ranking member Wyden is spearheading the movement to win passage of these energy tax incentives, seeking to attach them to a bipartisan aviation bill.

Please contact our office if you have any questions about tax reform and what measures might be taken now in anticipation of various changes.

©2016

Tax-related identity theft remains serious problem as filing season begins

In recent years, identity theft has mushroomed and as the filing season starts, tax-related identity theft is especially prevalent. Identity thieves typically file fraudulent returns early in the filing season, before unsuspecting taxpayers file their legitimate returns. Criminals gamble that the IRS will not detect the false return and will issue a fraudulent refund.

Background
Tax-related identity theft occurs when criminals use stolen identification information to file a return claiming a fraudulent refund. According to the U.S. Department of Justice, tax-related identity theft is on the increase and is also becoming more organized. Tax-related identity theft is often perpetrated by criminal enterprises, involving multiple individuals.

In 2015, the IRS held several high-level meetings with state tax authorities and tax preparation software providers. These security summits focused on ways to improve cybersecurity and curb tax-related identity theft. All three sectors have agreed to share more information, where allowed by law, to combat tax-related identity theft. The IRS has made a number of upgrades to its return processing filters and taken other behind-the-scenes measures to flag fraudulent returns.

Identity validation for taxpayers using tax preparation software has been enhanced. These steps are intended to protect taxpayer accounts by creating security questions and device identity recognition, the IRS explained. All these actions for 2016, the IRS has explained, will serve as the baseline for additional improvements for the 2017 filing season.

Steps
The IRS has described the steps taxpayers should take if they suspect their identities have been stolen and a fraudulent return has been filed in their name:

Taxpayers should contact the IRS and alert the agency that their identity has been stolen.
Taxpayers should file a paper return if they are unable to e-file (for example, the fraudulent return was e-filed).
Taxpayers should complete and file Form 14039, Identity Theft Affidavit, with their return.

After the taxpayer’s return and Form 14039 are received for processing by the IRS, the agency’s Identity Theft Victim Assistance (IDTVA) function will handle the case. This special unit will assess the scope of the issues to determine if the case affects one or more tax years as well as determining if there are other victims, who may be unknown to the taxpayer, listed on the fraudulent return. The IRS will mark the taxpayer’s account with an identity theft indicator and the taxpayer will receive an Identity Protection Personal Identification Number (IP PIN). According to the IRS, most tax-related identity theft cases are handled within 120 days but more complex cases may require additional time.

Verification of identity
Sometimes, the IRS may ask a taxpayer to verify his or her identity. This request is done by letter. The IRS explained that most verifications of identity can be done online or by telephoning the agency, but the IRS may request that an individual come in person to a Taxpayer Assistance Center to verify his or her identity.

If you have any questions about tax-related identity theft, please contact our office. If you believe your identity has been stolen or you have received a letter from the IRS asking you to verify your identity, please contact our office immediately. Our office can help you work with the IRS.

©2016

Transit benefits parity made retroactive and permanent

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended and enhanced many popular tax breaks for individuals and businesses. Included in the large number of extended incentives is transit benefits parity. Moreover, Congress made transit benefits parity permanent. Many individuals may benefit from this tax break, depending on their employers.

Background
Many employers encourage employees to use mass transit or van pools to commute to and from work. Federal tax law also encourages commuting by mass transit or van pooling by treating these incentives as qualified transportation fringe benefits.

In 2009, Congress first enacted transit benefits parity as a temporary measure. Previously, the amounts that could be excluded from income as qualified transportation fringe benefits were subject to one monthly limit for combined transit pass and vanpool benefits and a higher monthly limit for qualified parking benefits. Parity increases the monthly exclusion for combined employer-provided transit passes and vanpool benefits to the same level as the monthly exclusion for employer-provided parking.

As mentioned, parity was temporary. Between 2009 and 2015, Congress regularly extended transit benefits parity as part of an annual (or every two year) extension of the so-called tax extenders. Before the PATH Act, the most recent extension of transit benefits parity had expired after December 31, 2014.

Permanent and retroactive
In 2015, Congress made parity permanent. The PATH Act permanently extends parity with no expiration date, as under previous laws. The PATH Act also makes transit benefits parity retroactive to January 1, 2015.

For 2015, the monthly limit on the exclusion for combined transit pass and vanpool benefits is $250, the same as the monthly limit on the exclusion for qualified parking benefits. Therefore, the maximum monthly excludable amount for the period January 1, 2015, through December 31, 2015, is $250 for transit passes and van pool benefits and also $250 for qualified parking. For 2016, the monthly exclusion for each benefit is $255.

IRS guidance
In Notice 2016-4, issued after passage of the PATH Act, the IRS clarified how employers should address the retroactive increase for periods after 2014 in the monthly exclusion for transit passes and van pooling benefits. The IRS also provided a special administrative procedure for employers to make adjustments on their Forms 941, Employer’s Quarterly Federal Tax Return, filed for the fourth quarter of 2015, and in filing Forms W-2, Wage and Tax Statement.

Bicycles
Federal tax law also provides an exclusion for commuting by bicycle. An employee must regularly use a bicycle to commute between his or her home and place of employment. The exclusion is generally limited to $20 per month, subject to certain restrictions. The PATH Act did not make any changes to the tax rules for commuting by bicycle.

If you have any questions about transit benefits parity, please contact our office.

©2016

New ACA information forms debut for 2016 filing season

As the 2016 filing season gets underway, many individuals will be receiving new information returns from their employers and/or health insurance providers. The information returns reflect new reporting requirements put in place by the Affordable Care Act. Some taxpayers will need to wait to file their returns until they receive their information returns, but most taxpayers will not.

Background
The ACA generally requires certain employers, insurance providers and the Health Insurance Marketplaces to provide statements to covered individuals about their health insurance coverage. Under the ACA, all individuals must carry minimum essential health insurance coverage or make a shared responsibility payment, unless exempt. Individuals who obtain coverage through the Health Insurance Marketplace may qualify for a special tax credit, the Code Sec. 36B credit, to help offset the cost of coverage.

Forms
The IRS has developed new forms for ACA reporting:

Form 1095-A, Health Insurance Marketplace Statement, the Health Insurance Marketplaces provide Form 1095-A to individuals enrolled in coverage, with information about the coverage, who was covered, and when.
Form 1095-B, Health Coverage, health insurance providers (for example, health insurance companies) send this form to individuals they cover, with information about who was covered and when.

Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, Certain employers send this form to certain employees, with information about what coverage the employer offered. Generally these are “applicable large employers.”

This is the second year that the Health Insurance Marketplaces have provided Forms 1095-A to enrollees. However, this is the first year that health insurance providers and certain employers have furnished Forms 1095-B and 1095-C to covered individuals.

Deadlines
Health Insurance Marketplaces must provide enrollees with Form 1095-A by February 1, 2016. This year, the IRS has given health insurance providers and certain employers more time to furnish Forms 1095-B and 1095-C to covered individuals. The deadline to provide Forms 1095-B and 1095-C is March 31, 2016. Forms 1095-A, 1095-B and 1095-C will be mailed to recipients or provided electronically if the recipient has agreed to electronic delivery. Health insurance providers and certain employers also must file information returns with the IRS (Forms 1094-B and 1094-C) but those forms have different deadlines.

Returns
The IRS has instructed taxpayers who have coverage through the Health Insurance Marketplaces to wait to file their 2015 tax return until they receive Form 1095-A. Many enrollees in Marketplace coverage have received advance payments of the Code Sec. 36B credit and will need to reconcile the advance payments when they file their 2015 tax returns. These individuals will use the information on Form 1095-A to complete a separate form (Form 8962, Premium Tax Credit). Form 1095-A is not attached to a taxpayer’s return but retained for his or her records. As always, our office is here to provide assistance.

Individuals with employer-provided health insurance and other qualifying minimum essential health care coverage do not need to wait to file their 2015 tax return until they receive Forms 1095-B or 1095-C, the IRS has instructed. While the information on Forms 1095-B and 1095-C may assist in preparation of a tax return, they are not required, the IRS explained. Individuals may use other forms of documentation, in lieu of the information on Forms 1095-B and 1095-C, to show insurance coverage, such as insurance cards or payroll statements reflecting health insurance deductions, the IRS further explained. Like Form 1095-A, Forms 1095-B and 1095-C are not attached to the taxpayer’s return but are retained for his or her records.

If you have any questions about Forms 1095-A, 1095-B or 1095-C and the information they report, please contact our office.

©2016