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Tax Season Cleanup: Which Records Can You Toss?

If you’ve filed your 2024 tax return, you may be eager to do some spring cleaning, starting with tax-related paper and digital clutter. The documentation needed to support a tax return may include receipts, bank and investment account statements, K-1s, W-2s, and 1099s. How long must you save these records? Three years is the general rule. But don’t be hasty: Failure to keep a paper trail for the information reported on a tax return could lead to problems if the IRS audits it.

The Basics

Generally, the IRS’s statute of limitations for auditing a tax return is three years from the return’s due date or the filing date, whichever is later. However, some tax issues are still subject to scrutiny after three years. If the IRS suspects that income has been understated by 25% or more, the statute of limitations for audit rises to six years. If no return was filed or fraud is suspected, there’s no limit on when the IRS can launch an inquiry.

It’s a good idea to keep copies of your tax returns indefinitely as proof of filing. Supporting records, such as canceled checks, charitable contribution receipts, mortgage interest payments, and retirement plan contributions, generally should be kept until the three-year statute of limitations expires. These documents may also be helpful if you need to amend a return.

So, which records can you throw away now? Based on the three-year rule, in late April 2025, you’ll generally be able to discard most records associated with your 2021 return if you filed it by the April 2022 due date. Extended 2021 returns could still be vulnerable to audit until October 2025. But if you want extra protection, keep supporting records for six years.

Records to Keep Longer

You need to hang on to some tax-related records beyond the statute of limitations. For example:

• Retain W-2 forms until you begin receiving Social Security benefits. That may seem long, but if questions arise regarding your work record or earnings for a particular year, you’ll need your W-2 forms to help provide the required documentation.
• Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection).
• Hang on to records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years.
• Retain records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses, until they have no effect, plus seven years.
• Keep records that support deductions for bad debts or worthless securities that could result in refunds for seven years because you have up to seven years to claim them. 

 Feel free to contact the office if you’re unsure about a specific document.

Retention Times May Vary

Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition of lending money, approving a purchase or otherwise doing business with you. Contact the office with questions or concerns about tax-related recordkeeping.

Payroll Fraud Threats Inside and Outside Your Company

Payroll fraud schemes can be costly. According to a 2024 Association of Certified Fraud Examiners (ACFE) study, the median loss generated by payroll fraud incidents is $50,000. It’s essential to know the payroll schemes making the rounds and how to prevent them or at least catch them before they go on very long.

Common Threats

Here are brief descriptions of some common payroll fraud threats:

Ghost employees. Perpetrators add made-up employees to the payroll. The wages of these “ghost employees” are deposited in accounts controlled by the fraudsters.

Excessive payments. Here, employees receive overtime pay by inflating their work hours.

Payroll diversion. Cybercriminals use phishing emails to trick employees into providing sensitive information, such as bank login credentials. This becomes a form of payroll fraud when they divert payroll direct deposits to accounts they control. Crooks might also target employers by sending them fake emails from “employees” requesting changes to their direct deposit instructions.

Expense reimbursement fraud. Employees receiving expense reimbursements might inflate their expenses, submit multiple receipts for the same expense, or claim nonexistent expenses. When perpetrated by employees, this is related to payroll fraud because reimbursements are often added to paychecks.

6 Strategies for Preventing or Uncovering Payroll Fraud

Preventing payroll fraud and uncovering it quickly, if it still occurs, requires strong internal controls. Here are six strategies to strengthen your defenses:

1. Require two or more employees to make payroll changes, such as pay rates or adding or removing employees.
2. Flag excessive or unusual pay rates, hours, or expenses using exception reporting.
3. Closely monitor employee expense reimbursement requests. Notify employees when discrepancies are found and require corrections.
4. Regularly conduct payroll audits to detect anomalies.
5. Audit automatic payroll withdrawals to confirm proper transfers are made.
6. Allow changes to direct deposits only via email confirmation, requiring employee approval before processing. For example, ask the employee to verify that he or she requested the change.

In addition to employing fraud prevention strategies, educate employees about payroll schemes, phishing attacks, and the importance of not sharing sensitive information via email. According to the 2024 ACFE study, the median fraud loss for victim organizations that provided fraud training to executives, managers and employees was roughly half the loss reported by organizations without training programs.

Payroll Fraud Is Widespread

Payroll fraud can threaten businesses of all sizes and industries. Your organization can mitigate the risk by understanding the forms of payroll fraud and implementing robust internal controls, frequent audits and employee training.

The Tax Side of Gambling

Whether you’re a casual or professional gambler, your winnings are taxable. However, the Treasury Inspector General for Tax Administration reports that gambling income is vastly underreported. Failing to report winnings accurately can lead to back taxes, interest and penalties. Here’s what you need to know to stay compliant and potentially minimize your tax liability.

Reporting of Winnings

Federal law requires reporting all gambling winnings, cash or prizes (such as from casinos, lotteries, raffles, horse racing and online betting) at fair market value. Certain winnings are subject to federal tax withholding, reducing your risk of interest and penalties.

If winnings exceed certain thresholds (for example, $1,200 for slots, $5,000 for poker), the gambling establishment must issue Form W-2G to you and the IRS. Even if you don’t receive a Form W-2G, you’re still required to report gambling income.

Amateur or Professional?

If you’re an amateur, you’ll report your gambling income on Form 1040, Schedule 1. You can claim gambling losses as itemized deductions, but only up to the amount of your gambling winnings.

If you gamble as a profession, the tax rules are a little different because your gambling activities are treated as a business. To qualify as a professional gambler, you must demonstrate that gambling is your primary source of income and that you engage in it with continuity and regularity. Contact the office for more information on the tax rules for professional gamblers.

Staying Compliant

Tax compliance isn’t tricky, but it’s important. Here are some tips:

Log your gambling activities. Include details such as:

• Dates and locations of when and where you gambled,
• Types of wagers, and
• Amounts won and lost.

A log ensures that you accurately report winnings and helps you claim deductible losses when applicable. Having this substantiation can also be beneficial if you’re audited. Remember that a log kept contemporaneously generally holds more weight with the IRS than one constructed later.

Maintain a file of gambling-related receipts, statements and other documentation. Thorough documentation is critical, especially if you’ll be deducting gambling losses or if you’re a gambling professional and will be claiming gambling-related business expenses.

Adjust tax withholding or estimated tax payments if needed. Remember that income taxes must be paid annually via withholding or estimated payments. If the tax you owe on the April 15 filing deadline exceeds what you paid during the tax year through withholding and estimated payments, you might be subject to interest and penalties.

A Risky Bet

The tax rules for gambling income can be confusing. However, failing to report winnings is a risky bet that can result in back taxes, interest and penalties. Contact the office for help.

Stuck in the Middle: The Sandwich Generation

The term “sandwich generation” was coined to describe baby boomers caught between caring for their aging parents and their children. Today, it most commonly applies to Generation Xers and older Millennials. If you’re caught in the middle, it might be time for honest discussions about pressing issues such as funding children’s higher education and paying for a parent’s long-term care.

Start with the “bottom” of the sandwich: your children. What’s appropriate to share with them depends on their age. However, by high school, you should be talking about their post-graduation plans and how much you can offer for college or other financial needs.

The “top” half of the sandwich can be more challenging. Depending on their health status, finances and other factors, your parents may not welcome your involvement in their decision-making. They might minimize or dismiss your concerns and be highly resistant. Initiate a frank family meeting with your parents, siblings and their spouses, if appropriate. Many issues can be sensitive, and emotions may run high, so be prepared. One session may not be enough to accomplish your objectives.

Don't Believe the Myths

The IRS has posted a list of common refund myths on its website. For example, if the online Where’s My Refund tool or automated hotline doesn’t specify when a refund will be approved, there’s no point in calling the IRS. The tax agency won’t have additional details yet.

Also, don’t assume that Where’s My Refund is wrong if the refund amount is less than anticipated. The IRS may have adjusted your refund. If so, it will send you a letter explaining the adjustment.

While most refunds are issued within 21 days, some may take longer because the IRS requires additional information. If so, the agency will contact you.

Your Business Tax Information at Your Fingertips

The IRS Business Tax Account provides information to sole proprietors, partners of partnerships, and shareholders of S corporations and C corporations. Eligible business taxpayers who set up an account can use the hub to make electronic payments, schedule or cancel future payments and access other tools. They can also view their current balances, payment history, other business tax records, and digital copies of select IRS notices.

A newly added Income Verification Express Service enables lenders to easily access the income records of a business borrower, provided the taxpayer has authorized access. Here’s more: https://www.irs.gov/businesses/business-tax-account

Are You Backing Up Your QuickBooks File?

Everyone has lost computer files. A Word document here, part of a presentation there — maybe even a spreadsheet. It’s maddening. But usually work can be reconstructed. Lose a QuickBooks company file, though, and you’re in a world of hurt. It would be nearly impossible to rebuild your customer, vendor and product/service lists with the countless associated invoices, sales receipts and other transaction forms.

Even if you live in a geographical area where a crippling natural disaster isn’t likely to hit, you could still experience a fire or burst pipes. Or you might, for example:

• Be the victim of a hacker.
• Have your QuickBooks file become corrupt.
• Lose access to everything on your computer when it just stops working.

If you don’t have a backup, you risk losing more than data. You could lose your company. Your accounting data is the backbone of your business, and it’s essential to protect it. Here’s how it’s done.

Two Decisions and Some Preparation

Before you start backing up your QuickBooks file (your accounting data, templates, letters, logos, images, and related files, but not payroll), you’ll need to answer two questions:

1. Where do you want your backup to be located? On a CD or DVD? USB drive?
2. Do you want to automate the process or rely on yourself to remember to do it every day or so?

Whatever you choose, you can set up your backups from within QuickBooks.

You’ll have to be in single-user mode to back up your file. If you’re not sure which mode you’re in, open the File menu and look about halfway down the list. If it says Switch to Multi-User Mode, you’re good. If it says Switch to Single-User Mode, click on that option to make it active.

Also, it’s critical that your copy of QuickBooks is up to date. If you have automatic updates turned on, you should be OK. Just to be sure — and especially if you’re updating manually — open the Help menu and select Update QuickBooks Desktop to.

Setting Up Local Backups

There are two ways to create backups of your company file. The one being covered in this column is a Local Backup. These can be either manual or automatic.

Open the File menu and click Back Up Company, then Create Local Backup. In the window that opens, select Create Local Backup. Browse to the location where you want to store your file. This can be a removable storage device like a USB drive or a CD/DVD, something you can store away from your office. Then specify your preferences in the rest of the window by answering these questions:

• Do you want a date/time stamp?
• What’s the maximum number of backup copies you want in the location you selected?
• How often should QuickBooks remind you to back up (every X times you close your company file)? This is optional.

QuickBooks recommends that you select the Complete verification option. When you’re done, click OK.

Scheduling Automatic Backups

Instead of or in addition to the manual method of creating backup copies, with or without reminders, you can schedule automatic backups. In the window that opens after you’ve completed the Backup Options window, you can specify when you want your backups to occur. You can save your file immediately, save it immediately and schedule future backups, or just schedule future backups. Make your choice and click Next.

Do you want your file saved automatically when you close your company file every X times? Check that box. Otherwise, you can Back Up on a Schedule by clicking New.

Specify your options in the window pictured in the above image. Click Store Password to enter your Windows password to give QuickBooks permission to run your scheduled backup when you’re not at your computer. When you’re done, click OK. You can go back in and change these options at any time.

Restoring Your Company File Backup

QuickBooks contains tools to restore your company file backup, of course. You might need to do this to undo recent changes, for example. Restoring your backup will return you to the point where you created the backup file.

Open the File menu and select Open or Restore Company. In the window that opens, click Restore a backup copy, then Next. Select Local backup in the next window and Next. The file directory of your PC that opens will only contain .qbb (QuickBooks backup) files. Browse to where you saved the file and locate it. Highlight it so the name shows in the File name window. Click Open.

The next window informs you that you’re about to select a location for the backup file (which will be converted to a .qbw file). If you save it to the same directory with the same name, you will overwrite your existing file, which may or may not be what you intended. If you just want to move the backup file to your hard drive for now, rename one of the files or save it to another folder. When you’re ready, click Next. QuickBooks will warn you if you’re about to delete an existing file and overwrite it. (You’ll have to enter YES in a box to do so.)

Be Careful

Restoring a QuickBooks company backup file can be risky. Unless you have a lot of experience working with this process, contact the office for help. QuickBooks is usually pretty forgiving, but you can get into trouble working with your company file.

Upcoming Tax Due Dates

April 15

Employers: Deposit nonpayroll withheld income tax for March if the month deposit rule applies.

Employers: Deposit Social Security, Medicare and withheld income taxes for March if the monthly deposit rule applies.

Calendar-year corporations: Pay the first installment of 2025 estimated income taxes, using Form 1120-W.

Calendar-year corporations: File a 2024 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004). Pay any tax due.

Calendar-year trusts and estates: File a 2024 income tax return (Form 1041) or file for an automatic five-and-a-half-month extension (Form 7004, six-month extension for bankruptcy estates). Pay any income tax due.

Household employers: File Schedule H, if wages paid equal $2,700 or more in 2024 and Form 1040 isn’t required to be filed. For those filing Form 1040, Schedule H is to be submitted with the return, so it’s extended if the return is extended.

Individuals: File a 2024 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868). (Taxpayers who live outside the United States and Puerto Rico or serve in the military outside these two locations are allowed an automatic two-month extension without requesting an extension.) Pay any tax due.

Individuals: Make 2024 contributions to a traditional IRA or Roth IRA (even if a 2024 income tax return extension is filed).

Individuals: Make 2024 contributions to a SEP or certain other retirement plans (unless a 2024 income tax return extension is filed).

Individuals: File a 2024 gift tax return (Form 709) or file for an automatic six-month extension (Form 8892). Pay any gift tax due. File for an automatic six-month extension (Form 4868) to extend both Form 1040 and Form 709 if no gift tax is due.

Individuals: Pay the first installment of 2025 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.

April 30

Employers: Report Social Security and Medicare taxes and income tax withholding for the first quarter of 2025 (Form 941) and pay any tax due if all of the associated taxes due weren’t deposited on time and in full.

May 12

Employers: Report Social Security and Medicare taxes and income tax withholding for first quarter 2025 (Form 941) if all associated taxes due were deposited on time and in full.

Individuals: Report April tip income of $20 or more to employers (Form 4070).

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