It’s that time of year again where people are rushing to organize their tax info and to have their returns completed by the April 18th deadline. This year because April 15th falls on a weekend, the returns are due on the 18th. That being said, there are some issues that are important to keep in mind. The first deals with those who are not going to have their returns completed by the deadline. The second issue is for those who complete their returns — it may be time to prune some of those tax records.
For those of you who cannot complete their returns on time, there is no reason to panic. One of the mistakes many people make is that they rush to complete their returns by the April deadline and then they make mistakes. It is those mistakes that lead to IRS scrutiny and I can guarantee you no one wants that. Therefore, if you cannot complete your returns on time, the best course of action is to file for an extension. The IRS form you would use to file for your extension is form 4868. An extension is automatic for six months but what trips people up is that they need to keep in mind that it is an extension of time to file your returns, not to pay your taxes. Therefore, you have to go through a process to guesstimate your tax liability to determine whether you need to make a payment with your extension. Keep in mind that if you file for a federal extension it will automatically apply to the State of Michigan; however, once again, you may have to make an estimated payment.
I know that many people believe that if you file for an extension you increase your audit risk; that is not the case. Filing for an extension will not increase your audit risk. Filing sloppy returns or incomplete returns will definitely increase you audit risk, not for filing for an extension. Therefore, if you can’t properly complete and file your return by the April 18th deadline, do yourself a favor and file for an extension.
The other issue is for those of you who have completed your returns — it may be a good idea to prune your tax files. Without question you should save at least the last three years returns and the backup data. The IRS can audit you up to three years after you’ve filed your returns. That being said, in most cases I tell people to retain their tax information for seven years. In rare cases where the IRS suspects fraud or where you underreported your income by 25 percent or more, the IRS can extend the time for an audit. That is why I tell people to retain their information for at least seven years. Therefore, for anything past seven years, you are probably safe to destroy that information. One caveat to this deals with Social Security.
Before you destroy records from 10 and 20 years ago, it’s a good idea to check your Social Security earnings to make sure you received the proper credit for the years which you worked. If you have gotten the proper credit for your work years then there is virtually no reason to save your old returns and documentation.
It is important to keep in mind that your tax information contains lots of sensitive information such as your Social Security Number; therefore, you have to properly dispose of this material. My advice is that anything with tax information should be shredded in order to protect yourself.
One last note, to make filing your 2017 tax return as easy as possible, it is also a great time of year to set up a record system for your 2017 tax returns.
If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.