McKonomics

When Should You Keep and Throw Out Tax Documents?

Once your 2010 tax return has been put to bed, you can rest easy until it's time to prepare for filing next year...right? Wrong. Before you turn out the lights, collect all the vital materials from your 2010 return and store them in a safe place. The documents you don't need anymore can be thrown away, after shredding them or destroying them, of course.

In many cases, tax returns are now filed electronically, so that cuts down on the mound of paperwork you've faced in the past. But you still have to keep certain records for a minimum period of time. We're not a "paperless society" quite yet. Also, you must also cope with recordkeeping burdens for the 2011 tax year.

What sort of records are we talking about? It depends on your particular situation, but here are several common areas where record retention is a must. Otherwise, you can run any extraneous papers through the shredder.

Securities: Normally, you're advised to keep records of trading activities and 1099 forms for securities, especially as they relate to the "basis" of these investments.

Two Sets of Burdensome 1099 Rules are Repealed

President Obama has signed a law that repeals two sets of rules that had business owners, company managers and landlords up in arms because of the paperwork nightmare they created. The rules that involved businesses issuing a blizzard of 1099 forms were created by two laws enacted in 2010. Rental property owners had to begin complying with one of the sets of rules this year. The second set for other types of businesses was not scheduled to go into effect until next year. 

The new rules ignited an immediate firestorm of criticism, but repealing them took longer than some expected. 

Thankfully, all the attempted 1099 rule changes have finally been quashed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, which was signed into law on April 14, 2011. 

Not Ready to File Your Taxes?

If you need more time to get your tax information together, don't panic. You can get six additional months to finalize your return by filing Form 4868, Application for Automatic Extension of Time to File by the April 18th tax deadline. Remember, this is an extension to file your return, not to pay your taxes. Getting an extension to file allows you to avoid being hit with a failure-to-file penalty. 

To complete Form 4868 you will need to estimate your tax liability and pay the amount you owe by check, debit card or credit card. 

If your state has an income tax, you will also need to check with your state tax authority to find out how to extend your state return.   

What if you Can't Pay the Tax You Owe? The IRS recognizes that in extreme circumstances, some taxpayers may be unable to pay the full amount of taxes owed by the April 18th deadline. Consult with your tax adviser if you have questions about your situation. 

Here are some possible options. 

• Entering into an installment agreement. Taxpayers owing less than $25,000 in tax, penalties and interest, may be able to enter an installment agreement with the IRS.
• Using a credit card or debit card. The IRS accepts most credit and debit cards.
• Borrowing the money.
• Request additional time to pay. Taxpayers may be able to get an extended time to pay their tax bills in full (60 to 120 days) due to undue hardship. This will generally result in paying less in penalties and interest than paying through an installment agreement.

New IRS Guidance on Reporting of Employer Health Coverage

The IRS issued interim guidance to employers on the informational reporting on each employee's annual Form W-2 that lists the cost of the health insurance coverage they sponsor.  

The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage. It does not cause excludable employer-provided health coverage to become taxable. Employer-provided health coverage continues to be excludable from an employee's income, and is not taxable. 

The new requirements to provide employees with this information on W-2 Forms stems from the Patient Protection and Affordable Care Act, which was enacted just over a year ago. The interim guidance is generally applicable beginning with 2012 W-2 forms, which would be issued to employees by January 2013. 

Exception to the general rule for smaller employers: Employers that issue less than 250 W-2 Forms in 2011 will not be required to comply before January 2014. 

However, all employers can chose to rely on the guidance for 2011 W-2 Forms, even though it is not required. 

Under the new requirements, an employer must provide written information on W-2 Forms to employees showing them the remuneration paid during the calendar year. This must be done on or before January 31 of the following year (there are different rules if an employee terminates employment during the year.)