Article Highlights:

Underpayment of Estimated Tax and Withholding Penalty
Required Minimum Distribution Penalty
Late Filing Penalty
Late Payment Penalty
Negligence Penalty
Fraud Penalty
Dishonored Check Penalty
Missing ID Number Penalty
Early Withdrawal Penalty
Failure to Report Tips Penalty
Foreign Reporting
Excessive Claim Penalty
Frivolous Return Penalty
Failure to File Information Returns Penalty

Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply not aware of the penalties or the possible impact on their wallets. As tax season approaches, let’s look at some of the more commonly encountered penalties and how they may be avoided. Underpayment of Estimated Taxes and Withholding Penalty – The United States income tax system is a pay-as-you-earn tax system, which means that taxpayers are required to pay their tax liability as they receive income during the year through withholding or by making estimated tax payments. If a taxpayer owes more than $1,000 when filing their return for the year, the IRS will assess the underpayment of estimated tax penalty, which is currently 3% of the underpayment. There are “safe harbor” payments that can protect you from this penalty, which include payments in the following amounts: 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of the current liability or 100% of the prior year’s liability. Because of the COVID-19 pandemic, 2020 has been a horrific year for many individuals and businesses; their income has been severely reduced, if not eliminated, because of government-mandated shutdowns and social distancing. This large drop in income can have a huge impact on the necessity of estimated tax payments. Normally, estimated tax payments are made in four installments that are due by April 15, June 15, September 15 and January 15 of the subsequent year. For 2020, the April 15 and June 15 estimated payments were suspended until July 15. The 100% and 110% of the prior year’s tax liability are most likely not viable safe harbor amounts for 2020 estimated tax, and most taxpayers will have to rely on 90% of the current year’s tax liability. Please contact this office to see if you need to make payments and, if so, how much. Required Minimum Distribution (RMD) Penalty – To prevent an individual from investing in tax-deferred retirement plans, including traditional IRAs, but never withdrawing funds from the plans (which would mean the government wouldn’t ever collect taxes on the distribution), retirees must take an RMD each year after reaching the mandatory RMD age. The mandatory distribution age has recently changed from 70½ for years before 2020 to 72 in 2020 and later years. Failing to take the correct minimum distribution (also known as excess accumulation) results in a penalty of 50% of the difference of what should have been withdrawn and what was actually withdrawn. However, the IRS is very liberal in general and will abate the penalty in most situations. However, this penalty is not an issue in 2020, as RMD to be made during 2020 has been suspended as part of COVID-19 tax relief. Late Filing Penalty – If a return is filed after the due date, including extensions, a late filing penalty of 4.5% per month (maximum 22.5%) applies. The normal due date for returns is April 15 of the subsequent year. Because of COVID-19, the due date for 2019 returns was extended to July 15, 2020, and the penalty for filing a late 2019 1040 return does not begin until after July 15, 2020. If you have not filed your 2019 return and did not file an extension by July 15, 2020, you are encouraged to do so as soon as possible to minimize penalties. If a return is over 60 days late, the minimum penalty for failure to file is the lesser of $435 or 100% of the tax shown on the return. While the obvious way to avoid a late filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect. Late Paying Penalty – When the tax owed on a return is paid after the unextended due date of the tax return (July 15 for 2019 returns filed in 2020), the taxpayer is subject to a penalty of 1/2% per month (maximum 25%) on the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return; many fail to realize that the extension does not include an extension to pay. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension. Negligence – When underpayment is due to negligence on the part of the taxpayer or there are errors in tax valuations, a penalty of 20% of the tax underpayment is charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions. Fraud – This penalty is 75% of the tax unpaid due to fraud. Dishonored Check – The penalty for dishonored checks of over $1,250 is 2% of the check amount. If the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late payment charges, but the penalty rate is lower if you are on a payment plan. Missing ID Number – A penalty of $50 for each missing number applies when a taxpayer doesn’t provide a required Social Security number (SSN) for themselves, a dependent or another person on their tax return. It is also charged when the taxpayer doesn’t provide their SSN to another person or entity when required. Early Withdrawal Penalty – If a taxpayer is under age 59-1/2 and withdraws assets (money or other property) from a qualified retirement plan, including traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as the early withdrawal penalty. This tax is 10% of the part of the distribution that the taxpayer was required to include in gross income for the year of the distribution. There are a number of exceptions that apply to this penalty. As part of COVID-19 relief, this penalty is waived on distributions up to $100,000 from qualified retirement plans and traditional IRAs if the taxpayer:

Has been diagnosed with SARS-CoV-2 or COVID-19 virus by a test approved by the Centers for Disease Control and Prevention (CDC),
Has a spouse or dependent who has been diagnosed with such a virus or disease by such a test, or
Experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to such a virus or disease, is unable to work due to lack of child care attributed to such a virus or disease, experiences closure or reduced hours of a business owned or operated by the individual due to such a virus or disease, or other factors that may be determined by the Secretary of the Treasury. These other factors include the following additional situations in which the penalty will be waived: o The taxpayer’s spouse or a member of the taxpayer’s household (someone—related or not—who shares the taxpayer’s principal residence) had adverse financial consequences of the type listed above that apply to the taxpayer. o The taxpayer, the taxpayer’s spouse or a member of their household had a job offer rescinded or the start date delayed due to COVID-19. o The taxpayer’s spouse or a member of their household had to close or reduce operation hours of a business they owned or operated due to COVID-19.

Note that the eligible COVID-19 distributions are subject to income tax but escape the early distribution penalty. However, this special COVID-19 provision allows a taxpayer to spread the income from a coronavirus-related distribution over a three-year period, and the distribution can be recontributed during the 3-year period. Failure to Report Tips – A penalty is charged if a taxpayer didn’t report tips to their employer. It equals 50% of the Social Security tax on the unreported tips. Reporting Foreign Accounts and Assets – There are numerous and substantial penalties for failure to report a variety of foreign accounts and assets, and some of the penalties are even draconian. Please contact this office if you have a foreign financial account, foreign trusts, ownership in a foreign corporation, received foreign gifts, etc. Excessive Claim Penalty – If a claim for refund or credit for income tax is made for an excessive amount, the person making the claim is liable for a penalty equal to 20% of the excessive amount. The excessive amount is the amount by which the claim for any tax year exceeds the amount of the claim allowable for that tax year. The penalty doesn’t apply if it is shown that the claim for the excessive amount is made with reasonable cause. The penalty also does not apply if any portion of the excessive amount or credit is subject to an accuracy-related penalty. Frivolous Return – In addition to any other penalties, the law imposes a penalty of $5,000 for filing a frivolous return—one that does not contain information needed to establish the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or displays a desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs. Under limited circumstances, the IRS may reduce the penalty from $5,000 to $500. Failure to File Information Returns – A taxpayer who, without reasonable cause, fails to file required information return in the manner the law specifies or by the proper deadline, fails to include all of the information required or includes incorrect information is subject to a penalty of $280 for each return required to be filed during 2020. The penalty is reduced to $50 if the failure is corrected within 30 days of the due date and $110 if corrected by August 1. Please call if any of these penalties have been assessed against you to see if it is possible to have them reduced or removed.

You have until 8/31/2020 to take advantage of the suspension of Required Minimum Distributions (RMDs) from retirement accounts. Learn more in this video.
.embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

Article Highlights:

General statute is 3 years
Some states are longer
Fraud, failure to file and other issues can extend the statute
Records to dump
Record to Keep Longer

Tired of having all those old tax records taking up drawer or closet space and collecting dust. Want to dump as much as you can? People often ask how long records must be kept and the amount of time IRS has to audit a return after it is filed. How long to keep the records depends on the circumstances! In most cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments. In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has a number of exceptions:

The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return in order to evade tax; or (c) deliberately tries to evade tax in any other manner.
The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.

If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.

Examples: Susan filed her 2016 tax return before the due date of April 17, 2017 (the 15th fell on weekend). She will be able to safely dispose of most of her records after April 17, 2020. On the other hand, Don filed his 2016 return on June 1, 2017. He needs to keep his records at least until June 1, 2020. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.
Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property transactions, social security benefits, etc. You should also keep certain records for longer than 3 years.

These records include:

Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after final sale.
Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.

Tax return copies from prior years are also useful for the following:

Verifying Income. Lenders require copies of past tax returns on loan applications.
Validate Identity. Taxpayers who use tax-filing software products for the first time may need to provide their adjusted gross incomes from prior years’ tax returns to verify their identities.

The IRS Can Provide Copies of Prior-Year Returns – Taxpayers who have misplaced a copy of a prior year’s return can order a tax transcript from the IRS. This transcript summarizes the return information and includes AGI. This service is free and is available for the most current tax year once the IRS has processed the return. These transcripts are also available for the past 6 years’ returns. When ordering a transcript, always plan ahead, as online and phone orders typically take 5 to 10 days to fulfill. Mail orders of transcripts can take 30 days (75 days for full tax returns). There are three ways to order a transcript:

Online Using Get Transcript. Use Get Transcript Online on IRS.gov to view, print or download a copy for any of the transcript types. Users must authenticate their identities using the Secure Access process. Taxpayers who are unable to register or who prefer not to use Get Transcript Online may use Get Transcript by Mail to order a tax return or account transcript.
By phone. The number is 800-908-9946.
By mail. Taxpayers can complete and send either Form 4506-T or Form 4506T-EZ to the IRS to receive a transcript by mail.

Those who need an actual copy of a tax return can get one for the current tax year and for as far back as 6 years. The fee is $50 per copy. Complete Form 4506 to request a copy of a tax return and mail that form to the appropriate IRS office (which is listed on the form). If you have questions about which records you should retain and which ones you can dispose of, please give this office a call.

Article Highlights:

Away-from-home travel
Lodging and meals
Entertaining for charity
Automobile travel
Uniforms
Substantiation requirements

If you volunteered your time for a charity or governmental entity during the COVID-19 pandemic, you probably qualify for some tax breaks. These rules actually apply to all charity volunteers not just COVID-19 volunteers. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:

Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if your services for a charity do not involve lobbying activities.
The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the costs of your own entertainment and meals are not deductible).
If you use your car or other vehicle while performing services for a charitable organization, you may deduct your actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:

No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles and computers. Example: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate the value of her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work. However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent that its use is related to providing services for a charity. Thus, for example, a taxpayer is allowed to deduct the fuel, maintenance, and repair costs (but not depreciation or the fair rental value) of piloting his or her plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer—such as Kathy in our example, who participated in a mounted posse that is a civilian reserve unit of the county sheriff’s office—could deduct the cost of maintaining a horse (shoeing and stabling).
A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes. So, for example, this rule would knock out a deduction for COVID-19 personal protective equipment such as face coverings and gloves that an individual purchased and used while volunteering at a food bank if the volunteer retains these items after performing the volunteer work. But if that individual purchased and donated PPE to the county for use by medical personnel at a coronavirus testing site, the cost of the items would be allowed.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization (including a government agency). To verify your contribution:

Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

There are also other special charitable provisions for the 2020 tax year, including:

Taxpayers that do not itemize their deductions can deduct up to $300 of cash contributions.
Cash contributions for those that do itemize their deductions are not limited to 60% of their adjusted gross income in 2020.
Employees (where their employer participates) can contribute the value of unused paid vacation and leave time to qualified charities and not have to include the leave payments in income.

For additional details related to expenses incurred as a charity volunteer or the special 2020 charitable provisions, please contact this office.

The consequence of cheating on your tax return can be much bigger than you thought, including substantial monetary penalties and the possibility of jail time for blatant cases. Watch the video to avoid making mistakes that can lead you to an IRS Audit.
.embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

August 10 – Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2020. This due date applies only if you deposited the tax for the quarter in full and on time. August 17 – Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in July. August 17 – Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in July.