Client Alerts After Tax Day: Take These Action Steps

05.12.22 | By: Robert Swenson

The April tax filing deadline has passed, but that does not mean you should push your taxes out of your mind. If you filed an extension, you should gather your remaining tax information sooner rather than later. Here are three other tax-related actions that you should consider taking in the near term.

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The April tax filing deadline has passed, but that does not mean you should push your taxes out of your mind. If you filed an extension, you should gather your remaining tax information sooner rather than later. Here are three other tax-related actions that you should consider taking in the near term.

Retain the requisite records

Depending on the specific issue, the IRS has years to audit your tax return so it is critical to maintain the records you may need to defend yourself. You generally need to keep the documents that support your income, deductions and credits for at least three years after the tax-filing deadline. It is important to note that no time limit applies to how long the IRS has to pursue taxpayers who do not file or file fraudulent returns.

Essential documentation to retain may include:

  • Form W-2, “Wage and Tax Statement;”
  • Form 1099-NEC, “Nonemployee Compensation,” 1099-MISC, “Miscellaneous Income,” and 1099-G, “Certain Government Payments;”
  • Form 1098, “Mortgage Interest Statement;”
  • Property tax payments;
  • Charitable donation receipts;
  • Records related to contributions to and withdrawals from Section 529 plans and Health Savings Accounts; and
  • Records related to deductible retirement plan contributions.

Hold on to records relating to property (including improvements to property) until the period of limitations expires for the year in which you dispose of the property. You will need those records to calculate your gain or loss.

Related Read: Out With the Old? Not So Fast When It Comes to Disposing of Tax Records

Plan for your 2022 taxes

You should be collecting the documentation that you will need for next year’s tax filing deadline on an ongoing basis. Keep up-to-date records of items such as charitable donations and mileage expenses.

In addition, this is a good time to reassess your current tax withholding to determine if you need to update your Form W-4, “Employee’s Withholding Certificate.” You may want to increase withholding if you owed taxes this year. Conversely, you might want to reduce it if you received a hefty refund. Changes also might be in order if you expect to experience certain major life changes this year, such as marriage, divorce, childbirth or adoption.

When it comes to strategies to reduce your 2022 tax bill, recent downturns in the stock market may have some upside. If you have substantial funds in a traditional IRA, this could be a ripe time to convert them to a Roth IRA. Roth IRAs have no required mandatory distributions and distributions are tax-free. You must pay income tax on the fair market value of the converted assets, but if you convert securities that have fallen in value or you are in a lower tax bracket in 2022, you could pay less in taxes now than you would in the future. Moreover, any subsequent appreciation will be tax-free.

The market downturn could provide loss-harvesting opportunities, too. By selling poorly performing investments before year-end, you can offset realized taxable gains on a dollar-for-dollar basis. If you end up with excess losses, you generally can apply up to $3,000 against your ordinary income and carry forward the balance to future tax years.

If you can itemize deductions on your tax return rather than claiming the standard deduction, you will want to consider “bunching” your charitable contributions.  You can accelerate future anticipated charitable contributions into 2022 or use a donor-advised fund to accomplish this.  You also might consider “bunching” expected medical expenses into 2022 to increase the odds that you can claim the medical and dental expense deduction. You are allowed to deduct unreimbursed expenses that exceed 7.5% of your adjusted gross income.

Respond to an IRS notice or audit

You might have no choice but to continue thinking about your taxes if you receive a tax return notice or audit letter from the IRS (and you would be notified only by a letter — the IRS does not initiate inquiries or audits by telephone, text or email). Such letters can be alarming, but do not assume the worst.

It is important to remember that receiving a question or being selected for an audit does not always mean you have tripped up somehow. For example, your tax return could have been flagged based on a statistical formula that compares similar returns for deviations from “norms.”

Further, if selected, you are most likely going to undergo a correspondence audit; these audits account for more than 70% of IRS audits. They are conducted by mail for a single tax year and involve only a few issues that the IRS anticipates it can resolve by reviewing relevant documents. According to the IRS, most audits involve returns filed within the last two years.

Do not ignore the letter. Doing so will eventually lead to the IRS disallowing the item(s) claimed and issuing a Notice of Deficiency which will make the issue much more difficult to resolve.

While correspondence audits are by far the most common, you could be selected for an office audit (in an IRS office) or field audit (at the taxpayer’s place of business). These are more intensive, and you should consult your ORBA tax professional with regard to any IRS or state inquiry.

Related Read: Prepare for IRS Plans To Increase Tax Audits

Stay ahead of the game

Tax planning is an ongoing challenge. We can help you take the necessary steps to minimize your filing burden, your tax liability and the risk of bad results if you are ever flagged for an audit.

If you have questions, please contact Rob Swenson at [email protected] or 312.670.7444.

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