Ella Joshua-Dixon is the latest example of the cynical adage that no good deed goes unpunished.
The Detroit native just wanted to help her financially struggling hometown by letting the Motor City have her 2011 municipal tax refund of $500.
And what did Detroit tax officials do? They sent her a bill for more than 10 times that.
The city's income tax division contended that Joshua-Dixon owed back taxes dating to 1999 that, when interest and penalties were added, came to $5,296.
Not so fast.
Detroit messed with the wrong taxpayer. The 47-year-old Auburn
Hills accountant had the documentation to disprove Detroit's tax billing.
In fact, reports the Detroit Free Press, Joshua-Dixon discovered that the city owed her another $416 in addition to the $500 she originally told the city to keep.
Luckily — or rather, really smartly — for Joshua-Dixon, she had her own documentation to refute Detroit's bad information.
It took her some time — Joshua-Dixon got the bad tax bill from Detroit just before Christmas 2012 — and she had to take time off work to present her evidence in person, but she straightened out the city.
Record keeping pays off: Not everyone is as diligent about keeping records for as many years as Joshua-Dixon, but her case is a good reminder to hang onto documents for at least as long as a tax jurisdiction has to audit you.
On the federal level, that's generally three years after you file your annual return.
| If you … |
Then the limitation period is … |
|
| 1 |
Owe additional tax and instances 2, 3 and 4 below do not apply to you |
Three (3) years |
| 2 |
Do not report income that you should and it is more than 25 percent of the gross income shown on your return |
Six (6) years |
| 3 | File a fraudulent return |
No Limit |
| 4 | Do not file a return |
No Limit |
| 5 |
File a claim for credit or refund after you filed your return |
The later of three (3) years or two (2) years after tax was paid |
| 6 |
File a claim for a loss from worthless securities |
Seven (7) years |
Source: IRS Publication 17, Your Federal Income Tax for Individuals
Of course, as the table above indicates, the limit increases for certain situations. And if the Internal Revenue Service suspects tax fraud, it can come after you any time.
But since none of my readers would ever think of defrauding the IRS, the three-year statute of limitations for tax audit is pretty safe.
If you don't want to hang onto boxes of paper, digitize your documents. The IRS has been accepting electronic records as proof of tax claims since 1997.
What to keep: To prove that you reported the correct income on your 1040, hang onto copies of W-2 forms, alimony payments from your ex, all types of 1099s (MISC, DIV, INT), gambling winning receipts or W-2G, bank
statements and deposit slips, brokerage statements and K-1 forms.
To account for the expenses and deductions
you claimed to reduce your taxable income, you'll need receipts, sales slips, invoices, canceled checks, credit card
statements, alimony payments you sent to your ex, gambling loss records and receipts from charities.
Also hold onto investment documentation until you sell the asset, including brokerage statements, mutual fund statements, 1099 and 2439 forms. These could be useful in establishing your basis, which you need when you sell so that you can properly calculate any capital gains or losses.
Don't forget about your retirement accounts. You should have filed Form 8606 for any nondeductible contributions to your traditional IRA. Without 8606 confirmation, all of the
contributions to your traditional IRA will be treated
as deductible amounts when withdrawn. That means that the IRA funds will be taxed (at ordinary income tax rates) unless you can show, with
satisfactory
evidence, that nondeductible contributions were made.
And keep forever a copy of each year's tax return
that you file. You can get destroy the back-up documentation once the statute
of limitation passes, but have on hand, either as paper or electronically, a copy of every Form
1040 and associated schedules that you have filed.
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