The Groves Report

It’s Tax Time Again

By William H. Barchilon
Certified Public Accountant
Licensed Real Estate Broker

The holidays are over, and that wonderful package from the IRS will be arriving soon. The deadline for 2007 tax returns is about 100 days away, and it’s time to go through your shoebox and sort your receipts or fret about how to tell your accountant what to declare as deductions for the year. As a tax professional, I can say that I prefer to have as much documentation as possible, but I fear that dreaded shoebox showing up a week before the tax deadline.

Each year, my clients have the same questions: What do I need to bring with me? What do I need to keep after my return has been filed? The answer to both questions varies with your return, but there are some general rules.

Your federal tax return is subject to audit anytime within three years of filing. If the IRS suspects a 25% understatement of income, the audit period can be extended to seven years. If fraud is suspected, the IRS can go back to 1913 (the first year of the current income tax). My advice is to keep a copy of the return and all materials that verify each item on the return for a minimum of seven years.

Documentation to bring your CPA and to keep includes: all W-2s, 1099s and any other evidence of income. Make sure you keep evidence that will verify all your subtractions from income. This includes evidence of IRA contributions, moving expenses, alimony paid and student loan interest. For those who itemize, keep all 1098s for mortgage interest, your HUD-1 statements from the purchase or refinance of any real property (so you can claim any points paid that may not be reflected on your mortgage company’s 1098s), and other items that substantiate mortgage interest (do not forget the motorhome or boat if they qualify as a second home). For those lucky to have capital gains transactions to report, keep records on the cost basis of the security (even if purchased many years ago!).

As the IRS has many of the above items, of utmost importance is documentation for items that are not reported. These include medical expenses, charitable deductions and any miscellaneous deductions (such as an office in the home, un-reimbursed employee, gambling losses, etc). With the IRS stepping up its audit function, keeping these materials is of the highest priority. In 2007, the rules regarding charitable donations have changed, requiring much more that just a blank receipt from a charity. For non-cash donations, you will need to establish that what you gave was in good condition (how to do that is still a subject for debate among tax professionals), while cash donations now require the charity’s acknowledgement of your gift. Medical expenses, while not reaching the threshold needed to be deductible on your federal return, are 100% deductible for Arizona. Therefore, all medical receipts should be kept for the standard seven-year period (do not forget your final paycheck to establish the deductibility of your health insurance if done on a post-tax basis).

I could go on and on about this issue, but space is limited. Suffice it to say that you should keep all the documentation necessary to verify all entries on your tax returns. In the past, IRS auditors have even asked for the marriage license of married couples to verify their status. While the IRS has backed off from some of its outlandish requests, you will still feel safer if you have the necessary materials. So add up all those receipts before you see your CPA and keep that shoebox full… Just don’t bring it in with you – your accountant’s heart may not be able to take it.