Article Highlights:

General statute is 3 years
Some states are longer
Fraud, failure to file and other issues can extend the statute
Keeping the actual return

Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed. It all depends on the circumstances! In many 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 that also apply to the state return. In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has several 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 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 2020 tax return before the due date of April 15, 2021. She will be able to safely dispose of most of her records after April 15, 2024. On the other hand, Don filed his 2020 return on June 1, 2020. He needs to keep his records at least until June 1, 2024. 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. You should 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 to prove the amount of profit (or loss) you had on the sale. Although brokers are now required in most cases to keep purchase records and report the information to the IRS when the stock is sold, it is still a good idea for you to maintain your own records, as you the taxpayer are ultimately responsible for proving the cost to the IRS if your return is audited.
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 the 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.

As we become more and more a paperless society, you may wonder if you must keep the paper version of the records mentioned in this article. No, you don’t – the paper documents can be scanned and maintained on your computer or in the cloud. But if you do convert the records to electronic files, be sure to maintain a back-up that can be retrieved if you have a computer crash or cyber attack that takes over your computer. If you have questions about what records to retain and what you can dispose of now, please give this office a call.

There are plenty of advantages to being your own boss, but that doesn’t mean that every decision is easy or straightforward. One of the first things you’ll have to decide is the type of business structure that is best for your situation. While selecting “sole proprietor” may seem like the path of least resistance, if you have personal assets at risk for your business’ debts and liabilities, it may make more sense to go with the more complicated route of electing to form as a C- or S-corporation, or even as a limited liability corporation (LLC). What is the difference between each? In a nutshell, if you set up as a C corporation – the preference of venture capital investors – you’ll have to pay taxes as both an individual and as a corporation. By contrast, both S corporations and LLCs have the advantage of a favorable pass-through tax treatment while still providing your personal assets with significant protection. No matter which entity you choose, you won’t find the process costly or complicated, and if you decide to switch at a later date you can do so easily. Still, it’s important to understand that filing a Certificate of Incorporation does not entirely protect you from personal liability. In order to provide yourself and your shareholders with the highest level of personal protection make sure that you do the following:

Never use your personal name or the name of a shareholder on any official documents. Whether invoices, correspondence, or contracts, the official corporate name is the only appellation that should be used, and the word “inc.” or “corp.” should be included where corporate. This is the best way to ensure separate entity recognition. The same is true whenever signing on the company’s behalf. Only use the corporate name and include your title, as shown below: CORPORATION NAME By: ___________________________________ Name and official title of the authorized signer
Maintain entirely separate bank accounts for your personal funds and your corporate funds, as well as separate taxes. Corporate tax liabilities should be paid from corporate accounts and personal taxes from personal accounts; the same is true for shareholders.
Assuming that you have corporate bylaws and other formalities, make sure that you follow all of them to a tee. This may include ensuring that meeting minutes are recorded, that the Board of Directors holds regular meetings, and that stock is issued.

The clearer and cleaner the line between the organization and the individual, the higher the level of personal protection, so make sure that there is a separation between corporate and individual transactions. If you have questions about what type of entity is right for you we can help. Contact us today for more information.

Article Highlights:

Informational Return Requirements
Due Date
Electronic Filing Requirement
Filing Extension

Even though organizations like charities and foundations may be tax-exempt, the IRS still requires them to file certain information every year. For many of these exempt organizations, the deadline to file their 2021 information return is Monday, May 16, 2022. In addition, tax-exempt organizations must file their forms electronically which makes compliance with reporting requirements easier. If an organization can’t make the May deadline, a 6-month automatic extension can be filed by May 16, 2022. If this office can be of assistance filing an information return and/or an extension, please call before the due date.