Archive for May, 2013|Monthly archive page

Are You Sure You Have No Foreign Reporting Requirements?

Originally published in the Cedar Street Times

May 31, 2013

My grandfather’s sister once had the opportunity to go toe-to-toe with the 1920s gangster, Al Capone…or so goes the family story.  She had ordered a fancy car and Capone sent a couple of his henchmen to convince her that she should allow him to purchase it since he did not want to wait for another one to be built.   She politely refused, at which point, they said Mr. Capone would like to talk with her in person.  So she drove to his place in Palm Island, Florida to meet the notorious gangster.  She was a rather outspoken individual, and managed to come out with her car, and did not even have to dodge bullets on the way past the front gate!  Most people know the interesting story about Al Capone is that the Feds could never get him for bootlegging, racketeering, prostitution, or murder, but they nailed him for tax evasion and failure to file tax returns!

Fast-forward the better part of a century and we are battling terrorism.  Sometimes it is difficult to prove that a particular individual was involved in an act of terrorism, but there may be other ways to get them.  How about the failure to report foreign accounts or even having signature authority over foreign accounts while residing in the United States?

Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts is required to be filled out each year for anyone that has bank or financial accounts (or is an eligible signer on someone else’s foreign accounts) that were established in a foreign country that aggregate $10,000 or more.  The form is due to the Treasury Department each year by June 30th (one month away).  Note this form does not go with your tax returns to the IRS.  The IRS has its own two-year old Form 8938 Statement of Specified Foreign Financial Assets which is more geared towards tax evasion and is filed with your returns.  It covers some additional assets and has different reporting thresholds, so you and your tax professional should review that as well.

The penalties for failure to file Form TD F 90-22.1 can be pretty sickening.  Willful neglect to file the form is punishable with civil and/or criminal penalties.  Civil penalties could be the greater of $100,000 or half of the account value.  Criminal penalties could be $250,000 plus five years in prison, or $500,000 and 10 years in prison if you are also violating another law simultaneously.  Even non-willful neglect (a.k.a. – your ignorance) carries a penalty of up to $10,000.  These are also applicable per year you fail to report!

The IRS was recently seeking six years in prison for a 79 year-old widow in Palm Beach, FL for such issues and related failure to report the income from foreign accounts.  I think the key is to just make sure you file the forms as needed, and have a discussion with your tax professional or an attorney if you are unclear if your assets qualify you to file these forms.

Oh, and if you happen to know any terrorists that need to file, please don’t forward my contact information…

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

When Can I Throw Out My Tax Returns?

Originally published in the Cedar Street Times

May 3, 2013

It is time to do some spring cleaning!  Do not miss your opportunity as summer is coming quickly, at which point you will be required to keep everything for another year.  Perhaps you will find that old pair of muddy tennis shoes in the garage – now the home to three indignant spiders as you turn their palace upside down.  Or maybe you will find that half-used bottle of hotel shampoo under the sink – a small, but satisfying entitlement for a $300 room charge.  Ah, and then there are those tax returns you filed way back in April – is it time to get rid of those too?!

You can do whatever you want, but my advice is to keep them.  In fact, I would say you may want to keep every tax return (and the supporting documents) you have ever filed – I know I have.  Record retention is always an interesting debate and you hear a lot of people say three, five, or seven years as a rule of thumb for many types of documents.  Regarding tax returns, the real answer is unique to each person depending on his or her tax circumstances and risk tolerance.

Someone that works a W-2 job, has no other sources of income, no investments, contributes to no retirement plans, and files the returns correctly would have little risk if discarding the returns after four years.  If you do make retirement plan contributions, depreciate any assets, have an installment sale agreement, or a host of other things, it would not really be wise to discard the returns in accordance with a rule of thumb.

The IRS generally has three years from the later of the due date (or extended due date) or the date you file to audit your returns.  The California FTB has four years from the later of the non-extended original due date or the date you file in order to audit.  You should never throw out returns or source documents until you are outside of these statutes of limitation.  If you have understated your gross income by more than 25 percent (even if by accident), then the IRS has six years to audit you.  People can get tripped up on this pretty easily if they fail to report stock sales.  I have seen this before with people preparing their own tax returns that ignore the 1099-B issued year-after-year because they did not really understand it.  If you filed a false tax return or there was any kind of fraud, there is no statute of limitations.

Even if you are outside the statute of limitations, however, you may still need prior tax returns to support positions you are taking on current tax returns that are inside the statute of limitations.  Think about someone that has been contributing to an IRA for many years and was unable to take deductions due to income limitations.  Each of these nondeductible contributions would have created basis in the IRA which would lower the taxable amount of distributions while in retirement.  If the IRS audited your returns in retirement and questioned your basis, having all the past tax returns showing the nondeductible contributions would be a saving grace.

People that have rental properties or home offices may find tax returns from twenty-five years ago helpful in proving the basis in the property when it is eventually sells due to depreciation deductions taken on each past return.  I have also had situations where clients had no idea what their cost basis was for a stock sale, and we were able to help recreate and substantiate the cost basis by reinvested dividends reported on tax returns stretching back several decades.

The safest thing to do is just keep them, or at least scan them and maintain the electronic files through the years.

One other pointer – be sure you do not throw out purchase records, refinance documents, or receipts of improvements to any type of property you own as you will likely need this information if you ever sell it.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.