How Long Should I Keep My Tax Records?

Was that a question that you’ve ever asked?


I know that I get that question asked of me quite frequently. Whether from a new client, or attending a social gathering, or even at a baseball game (I was actually asked this at a Mets baseball game at Citifield by a fellow fan during casual conversation).

Now that we are in full swing of this year’s tax season, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place.

Generally, we keep tax records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them.

With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later (IRC section 6501(a) in case you feel ‘geeky’). However, the statute of limitations for many states is one year longer than the federal law (Note: in NYS the rule is: Three years after the date the tax return was filed). In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return (NYS is six years after the tax return was filed). And, of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes (same for NYS).

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

Examples – Susan filed her 2013 tax return before the due date of April 15, 2014. She will be able to dispose of most of the 2013 records safely after April 17, 2017 (April 15, 2017 falls on a Saturday). On the other hand, Bob files his 2013 tax return on June 2, 2014. He needs to keep his records at least until June 2, 2017. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The Big Problem!

The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

Stock Acquisition Data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale.

Stock and Mutual Fund Statements (If you reinvest dividends) – Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale.

Tangible Property Purchase and Improvement Records – Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records, thinking the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains, particularly in markets where property values have steadily risen, so records of home improvements are vital. Records can be important, so please use caution when discarding them.

What About The Tax Returns Themselves?

While disposing of the back-up documents used to prepare the returns can usually be done after the statutory period has expired, you may want to consider keeping a copy of your tax returns (the 1040 and attached schedules/statements plus your state return) indefinitely. If you just don’t have room to keep a copy of the paper returns, digitizing them is an option.

If you have questions about whether or not to retain certain records,
contact Solid Tax Solutions first. We are available year-round. Our phone number is: (845) 344-1040.

It’s better to make sure, before discarding something that might be needed down the road.


<Bruce – Your Host at The Tax Nook

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Categories: Business, Income Tax


Recently, I wrote an article on this blog giving an introduction to A Bank Levy (you can read that article here). After writing that article I ‘got to thinking’ about a court case that gives a real life application of the affect of a Bank Levy and how time can play a role in its operation.
Since Tax Season is in full swing I was not able to write about it sooner but I did not forget about you.


So, this is a case which a California District Court heard in 2014 and is titled: United States of America v. JPMorgan Chase Bank NA (you can read the case here). If the decision in this case against JPMorgan Chase stands, banks may be more inclined to be lickety split when the IRS comes knocking with claims against a depositor’s money.

So to give you an overview of this case I will start with James Waterman who reported $21,584 of Adjusted Gross Income (AGI) on his 2008 tax return while claiming a refund of $78,169, which he received in August of 2009. Shortly thereafter, the IRS determined that Mr. Waterman actually owed $92,770.

Collection Officer Ted Hanson was assigned to the case. The Office of Chief Counsel gave Mr. Hanson authority to issue a Jeopardy Levy. There is potential for quite a bit of process when the IRS proposes to just take your stuff in order to satisfy a tax liability. A Jeopardy Levy, which is called for when there are indications that the taxpayer might be moving assets out of harm’s way, is quickly effective without the issuance of a notice informing the taxpayer of the right to a Collection Due Process (CDP) hearing, which can slow matters to a snail’s pace.

At around 9:30 AM on September 9, 2009, Mr. Hanson visited Mr. Waterman to demand payment of the amount owed. Mr. Waterman did not pay so Mr. Hanson served him with a series of documents, including a notice that IRS intended to levy his bank account.

A Race To The Bank!

Mr. Hanson then drove to the local Chase branch where Mr. Waterman had two accounts totaling $47,375.47. The jeopardy levy was served on one of Chase’s employees. Two hours later Mr. Waterman withdrew $40,000 from one of the accounts.

Chase was not in as much of a hurry as the other two players in the drama. Chase froze Mr. Waterman’s account two days later on September 11 and remitted the balance of $7,659.48, which included $0.32 of interest that had posted in the interim, to the IRS on October 1.

Who’s Responsible?

The thing about an IRS Levy is that if you are holding somebody’s property and you fail to turn it over to the IRS, the IRS can get it from you. So the IRS was looking for Chase to make up the $40,000 that left the account two hours after it had notice of the levy. Chase thinks that the IRS was being a little unreasonable and that IRS bears some of the blame.

It turns out that because this was a Jeopardy Levy, the collection officer was not required to explicitly give notice to Mr. Waterman that he intended to levy his bank accounts. Mr. Hanson, the Collection Officer, did so anyway, perhaps prompting Waterman to withdraw the money before Chase had time to freeze the account.

The District Court indicated that Mr. Hanson telling Mr. Waterman about the levy was improper. It went on to note that there are only two defenses to the levy.
One is that the entity being levied does not actually have anything that belongs to the taxpayer and the other is that there is a prior claim against the property.

Chase contended that it was entitled to a reasonable amount of time to react to the levy and that the IRS tipping Waterman off is what led to the loss. Chase’s argument did not go far with the judge.

“The fact of the matter, though, is that the IRS was required to tip Waterman off no matter what. Even when jeopardy assessments are made, the IRS must provide notice of demand for immediate payment before any levy may be imposed. 26 U.S.C. § 6331(a). While this notice does not necessarily inform the taxpayer that bank accounts will soon be levied, it certainly lets them know that something is afoot.

Moreover, Section 6332 does not contain any reasonableness element that would delay the vesting of the United States’ interest in property under a bank’s control.
The only requirement is that a bank “surrender any property … subject to levy” or risk being held liable for the disappearance of that property.
26 U.S.C. § 6332(d)(1). While it is true that the bank need not immediately “surrender” the property, it must upon being given notice preserve that property or run the risk of paying the depositor’s tax bill. That is the state of affairs here. Waterman’s money was “property … subject to levy,” the IRS agent served the bank with the levy giving it notice of the government’s claimed interest in the property, and Chase allowed it to slip away. Section 6332 is therefore applicable.”

So the Moral of the Story Is……..

An IRS Levy is No Joke!

Before it got to this stage, Mr. Waterman would have received several other notices from the IRS prior to the Jeopardy Levy and the visit by the IRS Collection Officer. A consultation with a competent tax professional would have avoided this horrid scene.

When you receive a notice (ANY notice) from the IRS (or the state) contact
SOLID TAX SOLUTIONS immediately at (845) 344-1040.


Bruce – Your Host at The Tax Nook

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Categories: Tax Debt


In the time that it took most of you to read that headline, fraudsters will have stolen nearly $10,000 from victims of identity theft. According to a recent report from research firm Javelin Strategy & Research, identity thieves have stolen $112 billion over the past six years. That works out to an astounding $35,600 (according to Javelin Strategy & Research) stolen every minute.


With those numbers, it’s no wonder that stories about identity theft are dominating the headlines. Yet, despite a heightened awareness about identity theft, consumers saw the number of identity fraud victims in the U.S. increase by 3% or 13.1 million consumers in 2015: that’s the second-highest level in six years.

Even as federal agencies and law enforcement attempt to tackle the problem, identity thieves seem to be one step ahead. “Fraud is evolving at a frantic pace although the amount of fraud has been relatively flat over the past four years. This just shows that when the industry cracks down on one type of fraud, criminals quickly shift their attack vector and area of operation,” said Al Pascual, Director of Fraud & Security at Javelin.

So, what is the latest trend? New account fraud. With existing account fraud taking a dip, largely due to increased monitoring, new account fraud has exploded, according to Pascual. Last year, new account fraud increased by 113% and now accounts for 20% of all fraud losses.

Unlike existing account fraud, where thieves use account numbers to access your existing bank accounts and credit cards, new account fraud happens when thieves use your personally identifying information, like your Social Security Number (SSN), to open new credit card accounts or apply for mortgages or lines of credit.

New account fraud is more expensive for consumers. According to Pascual, the average out-of-pocket cost to consumers to resolve existing account fraud is $30, compared to $250 for new account fraud. It’s also harder to detect than existing account fraud because you likely won’t get a call from a bank or credit card company when new charges appear because you may not even know about the new account for some time.

Thieves love the potential delay in reporting: it helps them stay ahead of the game. They can steal and get out, in some cases, before the consumer is even aware that it happened. What else makes it appealing? The wealth of personal information now available. One area of focus: those high profile Social Security Number (SSN) breaches. The medical data breach at Anthem affected potentially 80 million Anthem customers, including accounts associated with Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, Empire Blue Cross and Blue Shield, Amerigroup, Caremore, Unicare, Healthlink, and DeCare. Two breaches at the Office of Personnel Management affected nearly 26 million Americans. The attack on UCLA health systems resulted in the compromise of potentially 4.5 million patients and providers.

And the beat goes on. Data hacks, security breaches, and outright theft mean that the Personally Identifiable Information (PII) for millions of taxpayers is potentially available to identity thieves. That information can be used immediately to defraud consumers – or it can be packaged and sold on the black market. PII is definitely a hot commodity.

PII can not only be used to open new accounts, it can be used to access your tax data and potentially steal your tax refund. In 2015, Internal Revenue Service (IRS) reported that identity thieves illegally accessed tax information for hundreds of thousands of taxpayers using the “Get Transcript” tool on the IRS website. This year, the IRS advised that it was able to stop an attack on its Electronic Filing Personal Identity Numbers (e-filing PIN) application: unauthorized attempts made involving approximately 464,000 unique SSNs. In these cases, it has been suggested that the attacks were initiated using out-of-wallet information from a third-party tied to stolen SSNs. The results of those prior hacks tend to be most obvious at tax season when thieves are trying to reap the benefits of those stolen SSNs.

So What Can You Do to Protect Yourself During Tax Season?

  1. Don’t make it easy for thieves to get your Social Security Number (SSN): Pascual says, as a first step, that you should jealously guard your SSN.
  2. Avoid phishing emails and scams: Phishing often comes in the form of an unsolicited email or a fake website that poses as a legitimate site (like those pretending to be IRS) in order to get you to disclose your personal or financial information. Don’t follow any links from these e-mails to any websites where you might be asked for your personal information. Verify that you’re on a legitimate site before sharing your data; if you must access a particular site, log out from any links that you’re not sure about and navigate directly to the site instead. And remember: the IRS will not initiate contact with you by email (or phone) to discuss your account.
  3. Take data breach notifications seriously: According to Javelin, 64% more Social Security Numbers were exposed this year and there was a 110% increase in data on medical records made available to fraudsters. If you receive a notice from your bank, or the IRS advising you that your data may be at risk, pay attention. If you are advised that your personal information may be at risk, find out what specific, if any, information is at risk. Following up with credit monitoring might also be appropriate (As a side note: By law, you’re entitled to one free copy of your credit report each year from each of the major credit bureaus Equifax, Experian, and TransUnion: that’s a total of three reports every year [you may be entitled to additional copies if you’re the victim of identity theft]. To claim your free copy, visit Annual or call (877) 322-8228. Review your credit report like you do your credit card or banking statements: check to make sure that the transactions and credit requests are those that you’ve approved.).
  4. File early and plan ahead: If you’re concerned about the status of your refund, try beating the bad guys to the punch by filing early and planning ahead. The IRS and various states will be using new technology and screens this year to try to identify bogus returns: that could mean that your refund might take a little longer. If you’re counting on your check, file early to account for any glitches or delays. Additionally, some apps, like the “Get Transcript” tool have been affected by attacks on taxpayer data. This year, for example, taxpayers may request a copy of a transcript online but the results of the request will be mailed to the taxpayer which can take several weeks.
  5. Keep an eye on your bank and credit card statements. You don’t have to be obsessive but do check your accounts from time to time to make sure that the recorded transactions are actually yours. Investigate and immediately report any suspicious activity.
  6. Understand that public wi-fi access really does mean public: When you’re sitting in Starbucks or your local library (whether for business or pleasure), be careful. Why? Because your data may be vulnerable to interception. Don’t connect to an unknown wi-fi connection (make sure that it’s legitimate). If you have an alternative connection available like using cellular data, consider using that instead. If you must connect using public wi-fi, use a VPN (Virtual Private Network). And save the really sensitive data – like online banking – for later. It really is best to avoid websites that could expose your passwords or financial information to potential cyberthieves on public connections.
  7. Take care with private documents: With so much emphasis on internet security, it’s easy to forget to safeguard paper documents. Don’t be careless with credit card statements, bank receipts and copies of tax returns. File the copies you need and shred the ones that you don’t.
  8. Keep your mailing address current: We are an increasingly mobile society. It’s rare that you’ll retire in the home that you start out in. Chances are, you’ll switch addresses more than once. When you do move, make sure that you contact your financial institutions, credit reporting agencies and tax authorities so that your mail doesn’t end up in the wrong hands. To easily change your address with IRS file a Federal form 8822 – Change of Address (downloads as a pdf). Allow plenty of time for processing. You should also file a change of address with the US Postal Service; you can make the change online here.

So, what do you think about the IRS and Identity Fraud?

Do you think that the IRS is doing enough to protect taxpayers’ personal information?


Bruce – Your Host at The Tax Nook

Our Firm’s Website: (or just click on the icon on right sidebar of this page).

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Categories: Identity Fraud

Tax Rules for Piggyback Businesses!

No, this term has nothing to do with farms or state fairs. It refers to small business owners who carry their businesses on their backs. They work from Starbucks or mobile homes.

Piggyback ride

I couldn’t find any statistics on piggyback businesses, but I know a number of them. From a tax perspective, what does this mean?

Mobile Homes:

Some piggybackers want to deduct the cost of operating from a mobile home. This has come under IRS scrutiny, and here are some of the results from the Tax Court:

  • An insurance agent who sold policies at recreational vehicle (RV) rallies could not deduct his own RV expenses. While use of the RV has a substantial business purpose, the Tax Court said that they could not take a home office deduction because they used the RV for personal purposes for more than 14 days in the year. Any personal use, including watching TV in the RV, makes the entire day a personal day.
  • A consultant who used his motor home for business was allowed to deduct interest on the loan to buy it as home mortgage interest. However, much of the claimed business expenses for travel in the home was disallowed for lack of substantiation.
  • An orthopedic surgeon who used his motor home to facilitate his response to “stat” pages from hospital in which he worked, and to avoid the need to rent an office and pay for accommodations while on call, could not write off all that he claimed. He had argued that the Navigator was used as a “mobile office” 85% in one year and 100% in the next despite his mileage logs suggesting a much smaller percentage of business use. The court adopted the IRS’s percentages of business use (19.42% and 22.23% respectively).

Home Office:

Working outside of a home does not prevent a business owner from taking a home office deduction. As long as there is no other fixed location for the business and the home is used for substantial administrative or managerial activities of the business, it can qualify as the principal place of business and allow for a home office deduction. The space must be used regularly and exclusively for this purpose, and not occasionally, or also for personal reasons.

Use Apps:

It’s up to the business owner to maintain records needed to support write-offs related to piggybacking activities, such as travel. Use apps on your smartphone or tablet to facilitate recordkeeping for tax purposes.


If any of these, or similar, situations apply to you give Solid Tax Solutions a call: (845) 344-1040.


Bruce – Your Host at The Tax Nook

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Categories: Business

Are You Thinking About a Lump Sum Pension Payout? How That Decision Can Affect Your Taxes!

The popularity of traditional pension plans is steadily declining as many employers make the switch to 401(k)s and other defined contribution plans. According to the Pension Benefit Guaranty Corporation, there are just 38,000 defined benefit pension plans still in operation, compared to a peak of 114,000 in 1985. One of the biggest motivators behind the decline is the cost of maintaining these plans. In an effort to improve their bottom line, a number of companies have opted to freeze or terminate their pension plans altogether and offer employees a lump sum payment of benefits. While getting a large amount of cash all at once can be appealing, there are some potential tax implications you need to be aware of.

How Pensions Are Taxed

Generally, your pension benefits are fully or partially taxable, depending on how your account
was funded. The IRS considers your benefits to be fully taxable if you don’t have any investment in the contract. You’re not considered to have an investment if you didn’t contribute anything to the plan, your employer didn’t withhold contributions from your salary or you got back all of your contributions tax-free in prior years. Since defined benefit pensions are traditionally funded solely by the employer, it’s likely that any money you receive from a lump sum would be
considered fully taxable. If your plan allowed you to put in after-tax dollars, then you wouldn’t have to pay taxes on the part of your benefits that represents a return of your initial  investment.

Lump Sum Distributions

lump sum distribution would generally be subject to your ordinary income tax rate as well as the 20 percent federal withholding requirement. This means that 20 percent of your benefits would automatically be withheld by the plan administrator. If you were born before January 2, 1936 the IRS allows you to use alternate methods to calculate your tax liability. If you qualify, you can report part of the distribution as a capital gain and the rest as ordinary income or you can use the 10-year tax option to figure out the taxes due. You could also defer any taxes due by rolling your lump sum payment over to another eligible retirement account.

Lump Sum Rollovers

There are two basic ways you can roll over a lump sum pension payment. The first option is a direct rollover, which means the plan administrator transfers the money to another retirement account for you. The benefit of doing a direct rollover is that it exempts you from having to pay the 20 percent federal withholding. If your plan doesn’t allow for direct rollovers, you can roll the money over yourself. The plan administrator will send you a check, minus the 20 percent withholding. Keep in mind that the amount that was withheld will be treated as a taxable distribution unless you make up the difference.
Once you receive the check, you’ll have 60 days to deposit it into your retirement account. After the rollover is complete, you won’t have to start paying taxes on your pension benefits until you start making withdrawals. If you don’t deposit the money within the 60-day time frame, then you’ll have to report the whole amount as a taxable distribution.

Early Withdrawal Penalty

If you decide not to roll your lump sum payment or you miss the 60-day window, you may have to pay an additional 10 percent early withdrawal penalty if you’re under age 59 1/2. The IRS allows exceptions to this rule in certain situations. For example, you may be able to avoid the 10 percent penalty if you had to cash out your pension because of a total and permanent disability.
In cases where your employer is offering the lump sum as part of an early retirement package, you may also be able to avoid the penalty if you’re age 55 or older at the time you retire.

Before you take a lump sum pension payout it’s important to weigh all the pros and cons. Understanding how your taxes can be impacted can help you avoid major financial headaches later on.


Bruce – Your Host at The Tax Nook

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Categories: Income Tax

Can You Pay Your Tax Bill With Bitcoins?

Not This Year. That was the message the New Hampshire House of Representatives sent supporters of a legislative push that would have made the state the first in the country to allow residents to pay their taxes using bitcoin.

A Display of Bitcoins

The bill, HR552, introduced last year by New Hampshire State Representative Eric Schleien (R), was voted down last month by a vote of 264 to 74. The bill would have required the state’s treasurer to “develop an implementation plan for the state to accept bitcoin as payment for taxes and fees.”

Bitcoin first appeared on the global currency scene in 2009. Bitcoin is a digital currency which means that you don’t rely on an exchange of paper for transactions and there is no centralized bank that records your transaction. Instead, bitcoins are stored in a digital “wallet” which can be found on your computer. You spend bitcoins just as you would dollars on everything from shopping for furniture on to booking a vacation on Expedia.

While the popularity of Bitcoin is spreading, the government and taxing authorities have been slow to embrace the virtual currency. The IRS does not accept bitcoins as direct payment for your tax obligations nor do any states (though you can pay taxes and fees in some instances using payment processors). Schleien was hopeful that New Hampshire would be the first to accept the currency as payment for taxes and fees, calling the approach “innovative”.

While at work on the bill, Schleien worked to educate the public and his colleagues about Bitcoin, specifically addressing the issues of risks and costs. By using a third party payment processor like BitPay, he noted that there would be “no cost to the state” and “no risk to the state”. The conversion to dollars would be automatic, eliminating concerns about volatility.

Still, the legislature wasn’t ready to bite – yet. Schleien pointed out that 74 representatives voted in favor of the bill, a number he calls “pretty amazing”.

So what’s next? Schleien vows to try again. Now that he knows which of his colleagues aren’t on board with the bill, he can work to change their mind by educating his colleagues and voters about the bill. It could take awhile, he says, perhaps even two to three years. But, he says, “I’ll keep trying until it passes”.

So, what do you think about Bitcoin?

Will we see the day that the IRS, and State governments accept Digital Currency?


Bruce – Your Host at The Tax Nook

Our Firm’s Website: (or just click on the icon on right sidebar of this page).

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Categories: Digital Currency