Sometimes big IRS related terms can mean BIG trouble
If you have problems getting to sleep at night and you turn to the IRS tax code for help, you might find some vocabulary that is very foreign to words you use every day. One of the more common words used by the IRS is the term “contemporaneous”. So what does it mean and why should you care?
According to the IRS it means the records used to support a claim on your tax return were created and originated at the same time as your claimed deduction. In other words, if you realize that you forgot to get a receipt for something, you are out of luck if you try to get one at a later date.
Perhaps you know you had the expense, but you simply forgot to get a receipt. You can cry foul, but time and again the IRS has had tax courts uphold their elimination of a taxpayer’s deduction for lack of contemporaneous documentation. Here are some areas where contemporaneous documentation is especially important:
- Charitable contributions
- Business deductions for expenses and capital purchases
- Mileage logs
- Tip records
- Gambling losses
- Traveling and entertainment expenses
- Hobby losses
The donation of vehicles, boats, and planes is often the most cited area where lack of contemporaneous documentation is a problem. This is because the value of this type of donation can be high and the estimated market value could change each month. But timely, written acknowledgement from the charitable organization is also required for any donation of $250 or more.
What you need to know
- Always get a receipt. Before you leave a donated item, always ask for a receipt. In the case of a vehicle, make sure the charitable organization gives you a 1098-C fully filled out. In addition, make sure the organization uses your vehicle or is a qualified charitable group that allows you to take the full market value of your donation.
- If you forget, call right away. As soon as you realize a confirmation or receipt is missing, call to get one sent to you. Request that the receipt be dated as of the date of the service or activity.
- Think tax year. Understanding the definition of contemporaneous is important, because it is not always “precisely” defined. If the documentation is received in the same year as the donation or transaction, you are usually in good shape.
- Keep a log. Many expenses require the correct documentation at the time the activity occurred. This is true with deductible mileage, gambling loses, and documenting your tip income. So keep a log of your activities when they occur.
Wait to file. Often, to meet the IRS definition of contemporaneous, the receipt or acknowledgement must be received the earlier of either; when you file your tax return OR the due date (including extensions) of your tax return. This is particularly true with charitable contributions. So if you want to play it safe, do not file until all documentation is in hand.
Here are the chances your return will be selected
You can be audited the later date of either three years after the filing deadline of your tax return or when you actually filed your tax return. However, there are two main exceptions to this rule that can extend the risk of being audited;
|1||If the IRS audits a tax return and discovers an error of more than 25% of your claimed tax obligation they can go back six years.|
|2||If the IRS deems there is fraud involved, they can go back indefinitely.|
Every year the IRS publishes their examination statistics. Provided here are the last two years of published information and a look back to 2008 to identify any trends:
Audit Rate Statistics for INDIVIDUALS
|Fiscal Year Ending||2011||2010||2008|
|All Individual Tax Returns||1.11%||1.11%||1.00%|
|No Income (AGI)||3.42%||3.19%||2.15%|
|Income under $25,000||1.22%||1.18%||.90%|
|$25,000 – 50,000||.73%||.73%||.72%|
|$50,000 – 75,000||.83%||.78%||.69%|
|$75,000 – 100,000||.82%||.64%||.69%|
|$100,000 – 200,000||1.00%||.71%||.98%|
|$200,000 – 500,000||2.66%||1.92%||1.92%|
|$500,000 – $1 million||5.38%||3.37%||2.98%|
|$1 million – $5 million||11.80%||6.67%||4.02%|
|$5 million – 10 million||20.75%||11.55%||6.47%|
|$10 million and over||29.93%||18.38%||9.77%|
|Note: These audit rates are stated as a percent of total tax returns with “total positive income” (TPI) as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year.|
|Source: IRS Data Books|
|♦||Audit rates are up dramatically with the exception of those with incomes between $25,000 – $50,000.|
|♦||Upper income taxpayers can almost assume they will be audited every 3 to 5 years.|
|♦||Those with incomes over $10 million have seen their audit rate go up over 300% since 2008.|
In addition to the above statistics, the IRS audited over 134,000 taxpayers last year where no tax return was filed.
Play it safe
Always retain your tax records and support documents for as long as they may be needed to substantiate claims on your tax return. Make sure you consider any state record retention requirements as you review when it is safe to destroy old records. Remember some records need to be retained indefinitely. This includes, at minimum, copies of original tax returns, legal documents, and real estate transactions.
Each year standard mileage rates are set by the IRS. For 2012 they are:
Business Travel: 55.5¢/per mile
Medical/Moving: 23¢/per mile
Charitable Work: 14¢/per mile
Too often this deduction is overlooked because proper documentation was not followed. Here are a few tips to ensure you receive the full benefit of this tax deduction.
Tip 1: Track your applicable mileage in an auto log. This log is required to ensure your deduction is not disallowed during the course of an audit. Please make sure the business/charitable/medical purpose, date and distance is clearly noted.
Tip 2: Also keep track of parking, tolls and other miscellaneous travel expenses. These can often be deducted in addition to the standard mileage rate.
Tip 3: Submit expense reports if your mileage can be reimbursed. Most employers will reimburse you for business mileage at the approved rate, but many employees fail to ask for reimbursement. Remember, your employer can deduct this reimbursed expense on their tax return as well.
Tip 4: Keep track of medical miles. Even though you need to surpass a percent of your income prior to taking medical expenses as an itemized deduction, still keep track of qualified medical miles. It often only takes one major medical bill to make all your other excess medical expenses deductible.
Tip 5: Plan your business trips to ensure your miles are deductible. Commuting miles to and from work are not deductible. However, if you stop off at a supplier first, then the mileage from the supplier to your workplace is a deductible expense.
Tip 6: Do not forget charitable miles. This deduction is one of the most often overlooked deductions. Do you drive for Meals on Wheels or for a school function? Do you volunteer as a coach for a non-profit sporting group? These miles add up over time and are often not properly documented.
Help get the word out
The devastation caused by Hurricane (now Superstorm) Sandy is widespread. And while you may not have been impacted directly by the storm, you may know of someone who was. Fortunately, the relief wheels are in motion, albeit never fast enough. In an effort to help those impacted and to help get the word out to those who may have been impacted here are some tips.
- Qualified Disaster Area. The first step is to understand if you or someone you know is in a Designated Disaster Relief area. Counties in New York, New Jersey, Connecticut, and Rhode Island have been included in the Disaster Area for Sandy. Please go to the Federal Emergency Management Agency and review the covered areas. You may have to check often as the covered areas continue to change.
- What do I Qualify for? There are so many programs, how do you know what aid is available to you? FEMA has a number of resources available to help work through the maze of programs. Here is a link to these tools; http://www.fema.gov/apply-assistance. If someone you know has lost power or is dislocated, consider helping them walk through these tools.
- Relief Payments Received May Not be Income. Employers may donate money directly to an employee impacted by Superstorm Sandy without creating taxable income for the person receiving money. As long as the person receiving money qualifies, and the money is used for qualifying expenses not reimbursed by insurance, it is not considered taxable income. This also includes money received from individuals. While payments directly to an individual may not qualify as a charitable deduction for the donor, at least they are not deemed income to those in need.
- Qualified Expenses. Qualified expenses per the IRS include amounts to “cover necessary personal, family, living or funeral expenses not covered by insurance. They also include expenses to repair or rehabilitate a personal residence.”
- Tax-exempt Status Safe Harbor. Employer-sponsored private foundations can also provide disaster relief to their employee-victims without jeopardizing their tax-exempt status. Guidance on how to do this correctly can be found in IRS Publication 3833.
- Consider Donating Your Vacation. Employees can donate vacation, sick, or personal leave time off for employer cash payments to qualified tax-exempt organizations providing Sandy relief. The forgone time off is not considered income to the employee. In addition, your employer may deduct the amounts paid. This special tax benefit can be applied for time off before 1/1/2014.
- Tax Deadline Assistance. The IRS has postponed a number of tax and payment filing deadlines starting in late October and now gives impacted taxpayers until Feb. 1, 2013 to file the affected tax returns and pay any amounts due. The IRS will abate any late filing penalties and interest due. This includes:
- 4th quarter individual estimated tax payments (normally due 1/15/2013)
- 3rd/4th quarter excise tax returns and payments (due in the 3rd/4th quarter 2012)
- Tax exempt Form 990 return filings due during this period
- The IRS is also waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date and a delayed payment date. The delayed payment date is now set as November 26, 2012.
- Not in the Area? Relief is also available to a business or entity that is not located in the Declared Disaster Area but is impacted by the storm because the books, records, or tax professional is located within the disaster area. This includes those who are assisting in disaster relief activity. To receive this assistance you must contact the IRS directly (866-562-5227).
- Other Assistance. There are numerous programs available to those in need. The help includes grants for temporary housing, grants for home repairs, low-cost loans for uninsured property loses, and Transitional Housing Assistance.
Fortunately, to receive much of the aid outlined here you do not need to contact the IRS for approvals. The benefits are applied automatically. So, if you have been impacted by Sandy, or know of someone who has been impacted, please help get the word out.
|♦||Don Larsen, former New York Yankee baseball pitcher, suddenly decides to sell the uniform he wore when he pitched a perfect game during the 1956 World Series.|
|♦||Former NCAA basketball coach Bob Knight decides to sell all his basketball championship rings.|
|♦||Also up for auction:
What is happening
- Collectibles tax rates could be going up substantially in 2013 because the 28% tax rate on gains from the sale of these collectibles could be as high as 33-39.6%.
- Investment sales, like collectibles, could impact your Alternative Minimum Tax (AMT) exposure, effectively raising taxes on your other income in 2013.
- In addition, there could be an additional 3.8% tax on their memorabilia sales in 2013 because of a new Medicare surtax beginning in 2013 on investment earnings over $200,000 single and, with a marriage penalty, $250,000 for married couples filing joint tax returns.
- Even non-collectible investment tax rates are scheduled to rise. Long-term capital gains tax rates could go from 15% to 20% or higher.
- Review your investment portfolio for possible tax efficient transactions. This could mean selling a valuable collectible or other long-term gain investments.
- Consider making tax projections if the sale of investments might expose your income to the two Medicare surtax provisions (.9% of wages and 3.8% of investment income).
- Conversely, if you are an avid collector look for deals in December as other collectors sell their memorabilia to take advantage of the lower tax rates in 2012!