Richard GoldsteinRichard Goldstein

This month’s column will combine two topics: Midyear tax planning and document retention.

Document retention

A few times each year I’m asked: “how long should I keep my records?” Retaining and storing your documents is critical to support your tax returns should the IRS or other tax authority ask for documentation.

When determining how long you should keep records, a good rule of thumb is one year past the expiration of the statute of limitations for filing a tax return or amended return. For most individual taxpayers, the statute of limitations period is three years from the original due date of your tax return, or the date the return was filed. Therefore, if you filed your 2015 tax return on April 18, 2016, the statute of limitations runs to April 18, 2019 for the IRS to audit and assess a deficiency. If the return has a “substantial understatement of income,” which is defined as omitting income exceeding 25 percent of the gross income reported on the tax return, the statue is extended to six years. I believe the reason for income versus overstating deductions is that it’s easier to identify over stated deductions versus finding and proving that income has been understated.

Just to be on the safe side, you should, in my view, keep copies of all returns filed indefinitely and records for one year past the IRS statute of limitations. Some advisors recommend keeping the records for seven years regardless.

The following records should be kept for an indefinite time. These records include substantiating the cost basis of property that could eventually be sold such as investment property and business fixed assets. Clients have come to me after they sold their home indicating they made improvements to the property. Problem is no records exist to support the improvements. How do you think an auditor will handle this?

The IRS does permit taxpayers to store records electronically. The IRS issued a Revenue Procedure that provides specific rules on how retain accounting and financial data on a computerized system. These rules will apply to any type of federal tax record that is not maintained on a manual system.

Maintaining computing records

If you have at least $10 million of assets at the end of the taxable year, computerized record retention will apply. If total assets are less than $10 million, the rules will apply if at least one of the following conditions exists:

Information to support an amount of income, deduction, credit, or other items on a return is not available in hard copy, but is available in a computerized format.

Computations were made on a computer and cannot be reasonably verified or recomputed without the use of a computer.

The IRS notifies the taxpayer that computer records must be retained.

Of key importance is the requirement to also keep paper records. If the computer record retention rules apply, the taxpayer is not relived of the obligation to comply by keeping hard copies of the same information.

Electronic storage systems

Rev. Proc. 97-22 issues guidance on using electronic storage systems to satisfy record keeping requirements. An electronics storage system is used to prepare, record, transfer, index, store, preserve, and reproduce books and records by either electronically imaging hard copy documents to an electronically storage medium, or transferring computerized books and records to an electronic storage medium that allows them to be viewed or reproduced without using the original system. This requirement applies to taxpayers who are required to maintain books and records. Presumably, this applies to all taxpayers operating a business, other than farmers. While it’s not clear if individuals with salary or wage income can store records electronically, it is reasonable to assume that they can. If more information is needed, Rev. Proc. 97-22 and Rev. Proc. 98-25 is readily available on the Internet.

If you are interested in receiving a “Recommended Document Retention Time Periods” document, send me an email requesting the document at [email protected].

Midyear tax planning

Now is the perfect time to review where you want to be when it comes to tax planning. Unfortunately, I cannot go over all planning but have attempted to discuss what I consider key areas.

Retirement planning

If your business does not offer a retirement plan, you should consider doing this now. The current rules allow significant deductible contributions even if your business is only part-time or a side business. Contributing to a SEP-IRA or SIMPLE-IRA can enable your business to reduce your current tax liability while increasing retirement savings. With a SEP-IRA, as an example, you may be able to contribute up to 20 percent of your self-employment earnings, with a maximum contribution of $53,000. A SIMPLE IRA allows you to contribute up to $12,500 plus an employer match that could potentially be the same amount. If you are 50 or older, you can contribute an additional $3,000 to a SIMPLE-IRA.

Planning for the Baby Boomer generation

If you’ve reached 70-and-a-half, you can arrange to have up to $100,000 of otherwise taxable IRA funds paid directly to specified tax-exempt charities. The qualified distribution is federal-income-tax-free to you, but you cannot claim a charitable deduction on your tax return. Regardless, the tax-free treatment equates to a 100 percent deduction and you do not have to itemize deductions to get this. Furthermore, this will count towards your required minimum distribution that you are required by law to take. Caution: to qualify, the funds must go directly between your IRA and the charity.

Well, I’ve reached my word-count limit. More on this next month. Also, if there’s any topic that you want me to write about, please let me know.

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Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.