Nasty Notes from the IRS?

Letter writing may be a dying art, but official correspondence still arrives in the daily mail -including notices from the Internal Revenue Service.

If you receive one, here’s what to do.

* Scan the heading. The first line, generally printed in bold type and centered beneath your name and address, will tell you why the IRS is contacting you. For instance, the notice might be informational, such as an explanation that your payroll tax deposit and reporting responsibilities have changed. In that case, you simply need to comply with the new requirements.

Questions about missing information, additional taxes owed, or payments due mean you’ll want to take prompt action to avoid more notices or assessments of interest and penalties.

* Review the discrepancy. You’ll find the tax form and the year to which the notice applies printed in the upper right corner. Pull out your copy of the corresponding tax return, along with the supporting documents, and compare what you filed with what the IRS is questioning.

* Prepare your explanation. Are the proposed changes correct? Did the IRS misapply a payment? Whatever the issue, there’s usually no need to file an amended return. However, the IRS typically wants a response, either by phone or mail, in order to clear the notice from your account.

* Do not delay. Ignoring IRS correspondence will not make it go away. Reply to the IRS in a timely manner even if you don’t have all the information they are requesting.

Please contact us as soon as you receive a notice from the IRS or state or local taxing authorities. We’re here to set your mind at ease by answering your questions and helping you resolve the matter as quickly as possible.

Records – What to keep & What to Toss?

Is your file cabinet overflowing? Do you hesitate to purge tax information because you’re not sure what to keep and what to discard?

Here’s a quick guide to help you cut through the clutter.

* Assets. Keep brokerage confirmations, equipment purchase invoices, mutual fund statements, and real property closing statements a minimum of seven years after you report the final taxable sale of the asset on your return.
* Expenses. Substantiation for deductions includes charitable donation acknowledgments, receipts for employee business expenses, and automobile mileage logs. Retain these at least seven years after you file the return claiming them.
* Income. The same seven-year rule also generally applies to common tax forms such 1099s showing interest, dividend, and capital gains from banks or brokerages, and Schedule K-1s from partnerships and S corporations. However, the IRS recommends holding on to your W-2s until you start collecting social security.

Tip: Shred interim income reports once you’ve compared the totals to annual forms.
* Retirement accounts. You may have to calculate the taxable portion of distributions, so keep records detailing your contributions until you’ve recovered your basis.

* Tax returns. The statute of limitations is usually three years but can be six years if underreported income is involved. In cases of fraud or when no return is filed, the IRS has an indefinite time period for assessing additional tax.

As a general rule, keep federal and state returns a minimum of seven years. 

For additional information, including how long you should store business papers and payroll reports, please call. We’ll be happy to help you establish a records retention schedule.

Taxes for NonProfits?

Nonprofit organizations may have tax obligations

If you’re  on the board of a community organization or an officer of one, you may wonder about the tax requirements that apply to your organization. Generally, an organization will not owe taxes if two things are true:

* It has registered as an exempt nonprofit organization with the IRS, and

* It has no business income from activities unrelated to its exempt purpose.

Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group’s existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000 don’t even have to register to be considered exempt.

More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization’s exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn’t pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.

Once it’s registered, an exempt organization will have to file an annual information return on Form 990 or 990-EZ unless its yearly gross receipts do not exceed $50,000. Those exempt organizations with receipts of $50,000 or less must still file an annual return electronically on Form 990-N. Just as with a tax return, there are penalties for filing Form 990 or
990-EZ late or failing to file. There is no penalty on an organization that is required to file Form 990-N but fails to do so; however, if an organizations fails to file an annual return for three consecutive years, its exempt status is revoked.

Generally, the filing deadline is the 15th day of the fifth month after the organization’s year-end. For 2010 returns, the deadline for calendar-year organizations was May 16, 2011. For assistance with this or any of your tax filings, contact our office.