With the April 15th deadline to file your personal income tax returns approaching, which is actually extended to April 18th this year due to the 15th being the Emancipation Day holiday, there are some important tax issues everyone should consider and understand.
Extension to File: Individuals use IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, if they are not able to file their tax return by its regular due date. By filing the application for automatic extension of time to file, the deadline is automatically extended until October 17, 2011. An extension to file your tax return is just that, an extension to file the tax return. It is not an extension to pay your taxes. Pursuant to the Internal Revenue Code, if you are going to owe taxes when you eventually file your return you are supposed to pay that amount with the filing of your extension. Failure to pay with the extension can result in penalties for failure to pay, which is equal to one half of one percent per month. Additionally, by failing to pay the taxes owing by the deadline to file, April 18, 2011, you could possibly invalidate an extension to file, resulting in a failure to file penalty, which is equal to 5% of the taxes owing per month for a maximum of 25%. This failure to file penalty will be in addition to the failure to pay penalty and both will accrue interest. Accordingly, if you are going to submit an application for automatic extension of time to file your tax return, make sure you have properly estimated the taxes you will owe and submit that amount with your Form 4868.
Mailing of Tax Return: The postmark on the envelope when mailing your tax return is deemed the date the return was filed. However, the IRS does not retain your envelope when you mail your return. If there is ever a question of if or when you filed your tax return, the burden of proof is on the taxpayer to prove they filed their return timely. I recommend any filing with a taxing agency be sent certified mail with a return receipt requested to show the date it was filed and received by the government.
Review of Tax Return: When you file your federal income tax return, Form 1040, there is a statement you make when you sign the return which provides that “[U]nder penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” This statement forms the basis for prosecution by the Department of Justice if fraud is suspected on a tax return. It is each taxpayer’s responsibility to review their tax return for accuracy, especially if a paid preparer has prepared the return for them.
Proof of Cash: In the majority of audits, the IRS will request copies of your bank statements to ascertain if there is any unreported income. Essentially, the IRS will compare all of your deposits against the amounts claimed as income on your tax return. If there are deposits to your bank account that are not reflected on your tax return the IRS will presume you have unreported income. To overcome this assumption, you will need to show why such deposits are non-taxable. Accordingly, it is prudent to review the total income reported on your tax return against your total deposits to your bank account and note on your bank statements why such a deposit was non-taxable as you may forget two years later when the audit actually occurs. This simple proof of cash is a good practice to help you ascertain whether or not you reported all of your income or not.
Audits are Up: We are seeing more audit activity on the income tax front due to the increase in the estate tax exemption amounts. Fewer estates are subject to estate tax, so there is increased activity in the income tax arena. Accordingly, carefully review your returns and make sure you retain the necessary invoices and receipts to substantiate your deductions. Audits are generally a matter of proof. Make sure you retain your proof of entitlement to a deduction.
State is Broke: The State of California is broke and is looking for more tax revenue. California has been focusing more on sales and use taxes the past couple of years because that is a huge source of revenue for them. Back in 2009, the Assembly enacted Bill x4-18, which requires qualified purchasers to register with the Board of Equalization (BOE), to report and pay their use tax on an annual basis. Generally, a qualified purchaser is a business that receives at least $100,000 in gross receipts from business operations per calendar year and does not have an active sales or use tax account with the BOE. A qualified purchaser registers with the BOE by filing Form BOE-345-QP.
But, what is use tax? If you are a California resident or business and you purchase merchandise from a vendor located in another state, you may owe California use tax on your purchase if the product will be used, stored or consumed in California. Use tax is intended to protect California merchants who otherwise would be at a competitive disadvantage when out of state sellers make sales to California customers without charging tax. If the vendor does not collect tax on your purchase you must pay use tax on your purchases from out of state either on your California income tax return (Form 540, Line 95) or on a Use Tax Return, Form BOE-401-DS. The use tax rate in California is the same as the sales tax rate.
One may think that they are safe because how is the BOE going to find that they purchased products from an out of state vendor without paying tax? The BOE has become more aggressive in tracking down these types of transactions. The BOE has offices in other states to track purchases made in other states. BOE issues Summonses to businesses demanding information on California sales. BOE tracks some deliveries made from out of state to the end user and then contacts the end user directly. The BOE is able to go back eight years to make an adjustment if a return is not filed and more further if fraud is detected and proven.
As always, if you have any questions regarding a tax issue, please consult your local tax attorney or certified public accountant. Please note that pursuant to IRS Circular 230, the written advice provided in this article was not intended and cannot be used as a basis for avoiding the assessment of any tax penalty.