
Record Keeping

Happy New Year! New Year begins the tax filing process – and one of the critical factors is record keeping. A good record keeping makes it helpful, easier and less frustrating for filing the tax returns. Also, it enables you to explain and document any item on the return the IRS or other tax agencies might question, and could prevent you from having to pay additional taxes and penalties for unsubstantiated items. Especially business tax payers have a need to keep elaborate supporting documents substantiating income and expenses.
Below are some record keeping tips and documents that may help with your tax filings:
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W-2/wage statement: Verify that all information on the W-2 is correct – especially if you have deductions like donations, insurance, retirement plans. If you don’t receive W-2 before Jan. 31, 2014 of if you receive an incorrect W-2 – first contact your employer and then IRS requesting them to provide you with the copy of W-2 or transcript or corrected statements.
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Form 1099 These are important tax documents and there are various form 1099s for different tax purposes:
1099-Misc: Non-employee compensation, rental income, royalties, Other income
1099-B: Proceeds from Brokers – stock and securities transactions
1099-C: Cancelled debts
1099-DIV: Dividends – qualified dividends have a lower tax rate
1099-INT: Interest – Interest on investments including bank interest, CD/Money market 1099-G: Government refunds or payments
1099-Q: Education account distributions
1099-R: Pension and IRA distributions;
1099-T: Tuition fees paid.
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Receipts are important for tax deductions and credits such as donations, mortgage interest, property taxes, child and dependent care, education expenses, etc. For business tax payers, there may be additional record keeping including receipts for purchase of assets, payments to vendors, payments to employees, rent, and many other operating expenses.
With modern and latest technologies, most receipts can be saved and preserved electronically.
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Bank/Credit Card Statements
Many tax-related transactions are done through banks and credit cards. In such cases, it may be a good idea to save the statements including canceled checks. For business tax filers, bank and credit card statements are critical to report proper income and expenses.
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Schedule K-1 If you have a beneficial interest in partnerships, S-corporations, or other estates and trusts, you may receive schedule K-1 from the entity. The Schedule K-1 may slightly vary depending on whether it comes from a trust, partnership or S corporation. However, all K-1s provide detailed information about the type of income, deduction or loss so the recipient can accurately report the information on a tax return.
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Forms 5498/5498 ESA Any contributions made during the calendar year to any individual retirement accounts are reported on form 5498; 5498ESA is related contributions to educational accounts are reported on this form. Forms 5498 may arrive late sometimes even after filing the tax returns – so ensure that you have all relevant retirements and educational account information from the respective entities.
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Payroll records For business tax payers with employees, payroll record keeping is a important but complex task – there are various periodical filings of returns and payments, employee agreements, time cards, wage rate tables, work time schedules/time sheet, job evaluations, payroll reports, labor posters, etc.
The length of time you should keep a tax related document depends on the action, expense, or event the document records. You must keep your records as long as they may be needed to prove the income or deductions on a tax return.
There are various limitations and thresholds for many of the tax deductions. Please consult your CPA/Tax attorney/or tax consultant for proper guidance with the above subject matter.
DISCLAIMER: In accordance with IRS Circular 230, the above information is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.
Suresh Kumar, CPA, MBA is the Principal of Kumar Consulting, PA, a CPA & Consulting firm licensed in the states of FL, KS, and MO and can be reached at (813) 421-5068, e-mail [email protected] or visit www.kumarconsultingcpa.com
GUEST COLUMN
Voluntary Disclosure End Game: Sign Form 906 or Opt-Out? – PART II

Last month, we talked about the difficult decision of opting-out of the IRS’ offshore voluntary disclosure programs or signing the Form 906 and closing your case. We also identified one class of taxpayers who absolutely should not be considering opting-out: those who are even slightly at risk of having the willfulness penalty sustained against them, especially if they have numerous accounts. On the other side, this month in Part Two of this article, we review some discrete categories of taxpayers who may be good candidates for succeeding with the opt-out procedure and achieving a substantially lower penalty (or even zero penalty) than their proposed offshore penalty.
But even here, one must exercise caution because even the most likely candidate for a successful opt-out never can be 100 percent certain they will succeed. There is always an element of uncertainty, no matter how small, in this divining process so that even taxpayers falling under the categories described below should be well informed and well advised before making their final decision.
High Balances, Few Accounts
Since the maximum negligence penalty is $10,000 per account per year, anyone with a single foreign account significantly over $240,000 (or about $220,000 if in the 2012 OVDP) should at least do the math and consider opting-out. If the maximum negligence penalty outside one of the defined programs for one account is capped at $60,000 ($10,000 per year times 6 years of open FBAR statute of limitations) without consideration of the FBAR violation mitigation provisions in the Internal Revenue Manual, paying more than that under one of the defined programs (on a per account basis) would only be for taxpayers who fear application of the significantly higher willfulness penalty and need to stay in the defined program. For those with the opposite problem of having multiple bank accounts each with small to moderate balances (this happens quite a lot), the opposite is true: here, the standard FBAR per account per year penalties could be much higher than the proposed offshore penalty and the decision to opt-out becomes much harder to evaluate because the theoretical numbers look so skewed.
High Real Property Value and Low Bank Accounts
For taxpayers with undeclared income from foreign rental real estate, the value of such real estate must be included in the offshore penalty highest aggregate balance calculation. This is not true outside the defined programs where any FBAR audit can address undeclared financial accounts only, not foreign real estate. Accordingly, someone whose penalty calculation worksheet is comprised primarily of foreign real estate, and has few bank accounts having moderate balances, may find opting-out to be beneficial simply because their largest asset contributing to the offshore penalty is no longer in play for potential FBAR penalties. Beware, however, if you’ve had foreign property sales during the program disclosure period where the proceeds flowed through the foreign bank account. That spike in the bank account will contribute to the highest aggregate balance for offshore penalty purposes, and in effect, the value of the property will then be subject to the offshore penalty or considered during the FBAR audit and application of the mitigation provisions.
Immigrants with Solely Foreign Source Earnings and Savings
This is the category of taxpayers where we’ve seen the best chances of success with opting-out and avoiding all FBAR penalties. The typical taxpayer in this category is someone who had moderate to significant earnings and savings achieved before immigrating to the U.S., and never closed such accounts upon moving to the United States. Generally, this taxpayer also will not have sent any post-immigration U.S. source earnings overseas, nor brought any of the foreign source savings to the United States. Ideally, use of the foreign source funds will be limited to personal expenses incurred during occasional visits to their country of origin. In this situation, where offshore money remained offshore and onshore money (fully taxed in the U.S.) never went offshore, the taxpayer should have strong arguments to avoid all FBAR penalties during the post-opt-out audit.
Summary
The decision to opt-out or not is a difficult one highly dependent on the specific and unique facts of each individual taxpayer. Since there are no reported cases of prior opt-out decisions to rely upon, guidance on this topic comes primarily from the judgment and experience of qualified tax practitioners who have handled many such cases. If you are considering opting-out and haven’t been advised by an experienced tax lawyer, now would be the time to do so.
Rahul P. Ranadive is admitted to the Florida and California bars and the U.S. Tax Court, and has practiced international and domestic tax planning focusing on high net-worth families with international ties for fifteen years. He is based in Miami and can be reached at [email protected] or call (305) 913-7128 or visit www.gtecllp.com.
The foregoing is not tax or legal advice and should not be relied upon as such. No attorney-client relationship is created or implied with any reader of this article. All taxpayers should seek independent advice from a qualified tax professional based on their individual circumstances.