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File A Tax Amendment

File a tax amendment 5. File a tax amendment   Illustrated Examples Table of Contents Illustrated Example of Form 4563Line 1. File a tax amendment Line 2. File a tax amendment Lines 3a and 3b. File a tax amendment Lines 4a and 4b. File a tax amendment Line 5. File a tax amendment Line 6. File a tax amendment Line 7. File a tax amendment Line 9. File a tax amendment Line 15. File a tax amendment Illustrated Example of Form 5074Part I. File a tax amendment Part II. File a tax amendment Part III. File a tax amendment Illustrated Example of Form 8689Part I. File a tax amendment Part II. File a tax amendment Part III. File a tax amendment Part IV. File a tax amendment Use the following examples to help you complete the correct attachment to your Form 1040. File a tax amendment The completed form for each example is shown on the pages that follow. File a tax amendment Illustrated Example of Form 4563 John Black is a U. File a tax amendment S. File a tax amendment citizen, single, and under 65. File a tax amendment He was a bona fide resident of American Samoa during all of 2013. File a tax amendment John must file Form 1040 because his gross income from sources outside the possessions ($10,000 of dividends from U. File a tax amendment S. File a tax amendment corporations) is more than his adjusted filing requirement for single filers under 65. File a tax amendment (See Filing Requirement if Possession Income Is Excluded in chapter 4. File a tax amendment ) Because he must file Form 1040 (not illustrated), he fills out Form 4563 to determine the amount of income from American Samoa he can exclude. File a tax amendment See Bona Fide Resident of American Samoa in chapter 3. File a tax amendment Completing Form 4563. File a tax amendment   John enters his name and social security number at the top of the form. File a tax amendment Line 1. File a tax amendment   On Form 4563 (see later), John enters the date his bona fide residence began in American Samoa, June 2, 2012. File a tax amendment Because he is still a bona fide resident, he enters “not ended” in the second blank space. File a tax amendment Line 2. File a tax amendment   He checks the box labeled “Rented house or apartment” to describe his type of living quarters in American Samoa. File a tax amendment Lines 3a and 3b. File a tax amendment   He checks “No” on line 3a because no family members lived with him. File a tax amendment He leaves line 3b blank. File a tax amendment Lines 4a and 4b. File a tax amendment   He checks “No” on line 4a because he did not maintain a home outside American Samoa. File a tax amendment He leaves line 4b blank. File a tax amendment Line 5. File a tax amendment   He enters the name and address of his employer, Samoa Products Co. File a tax amendment It is a private American Samoa corporation. File a tax amendment Line 6. File a tax amendment   He enters the dates of his 2-week vacation to New Zealand from November 11 to November 25. File a tax amendment That was his only trip outside American Samoa during the year. File a tax amendment Line 7. File a tax amendment   He enters the $24,000 in wages he received from Samoa Products Co. File a tax amendment Line 9. File a tax amendment   He received $220 in dividends from an American Samoa corporation, which he enters here. File a tax amendment He also received $10,000 of dividends from a U. File a tax amendment S. File a tax amendment corporation, but he will enter that amount only on his Form 1040 because the U. File a tax amendment S. File a tax amendment dividends do not qualify for the possession exclusion. File a tax amendment Line 15. File a tax amendment   John totals the amounts on lines 7 and 9 to get the amount he can exclude from his gross income in 2013. File a tax amendment He will not enter his excluded income on Form 1040. File a tax amendment However, he will attach his completed Form 4563 to his Form 1040. File a tax amendment Illustrated Example of Form 5074 Tracy Grey is a U. File a tax amendment S. File a tax amendment citizen who is a self-employed fisheries consultant with a tax home in New York. File a tax amendment Her only income for 2013 was net self-employment income of $80,000. File a tax amendment Of the $80,000, $20,000 was from consulting work in Guam and the rest was earned in the United States. File a tax amendment Thinking she would owe tax to Guam on the $20,000, Tracy made estimated tax payments of $1,409 to Guam. File a tax amendment She was not a bona fide resident of Guam during 2013. File a tax amendment Tracy completes Form 1040 (not illustrated), reporting her worldwide income. File a tax amendment Because the adjusted gross income on her Form 1040 was $50,000 or more and at least $5,000 of her gross income is from Guam, Tracy must file Form 5074 with her Form 1040. File a tax amendment All amounts reported on Form 5074 are also reported on her Form 1040. File a tax amendment See U. File a tax amendment S. File a tax amendment Citizen or Resident Alien (Other Than a Bona Fide Resident of Guam) in chapter 3. File a tax amendment Completing Form 5074. File a tax amendment   Tracy enters her name and social security number at the top of the form. File a tax amendment Part I. File a tax amendment   On Form 5074 (see later), Tracy enters her self-employment income from Guam ($20,000) on line 6. File a tax amendment She has no other income from Guam, so the total on line 16 is $20,000. File a tax amendment Part II. File a tax amendment   Tracy's only adjustment in Part II is the deductible part of the self-employment tax on her net income earned in Guam. File a tax amendment She enters $1,413 on line 21 and line 28. File a tax amendment Her adjusted gross income on line 29 is $18,587. File a tax amendment Part III. File a tax amendment   Tracy made estimated tax payments of $1,409. File a tax amendment She enters this amount on line 30, and again on line 34 as the total payments. File a tax amendment Illustrated Example of Form 8689 Juan and Carla Moreno live and work in the United States. File a tax amendment In 2013, they received $14,400 in income from the rental of a condominium they own in the U. File a tax amendment S. File a tax amendment Virgin Islands (USVI). File a tax amendment The rental income was deposited in a bank in the USVI and they received $500 of interest on this income. File a tax amendment They were not bona fide residents of the USVI during the entire tax year. File a tax amendment The Morenos complete Form 1040 (not illustrated), reporting their income from all sources, including their interest income and the income and expenses from their USVI rental property (reported on Schedule E (Form 1040)). File a tax amendment The Morenos take the standard deduction for married filing jointly, both are under 65, and they have no dependents. File a tax amendment The Morenos also complete Form 8689 to determine how much of their U. File a tax amendment S. File a tax amendment tax shown on Form 1040, line 61 (with certain adjustments), must be paid to the U. File a tax amendment S. File a tax amendment Virgin Islands. File a tax amendment See U. File a tax amendment S. File a tax amendment Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI) in chapter 3. File a tax amendment The Morenos file their Form 1040, attaching Form 8689 and all other schedules, with the Internal Revenue Service. File a tax amendment At the same time, they send a copy of their Form 1040 with all attachments, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. File a tax amendment The Virgin Islands Bureau of Internal Revenue will process this copy. File a tax amendment Completing Form 8689. File a tax amendment   Juan and Carla enter their names and Juan's social security number at the top of the form. File a tax amendment Part I. File a tax amendment   The Morenos enter their income from the USVI in Part I (see later). File a tax amendment The interest income is entered on line 2 and the net rental income of $6,200 ($14,400 of rental income minus $8,200 of rental expenses) is entered on line 11. File a tax amendment The Morenos' total USVI income of $6,700 is entered on line 16. File a tax amendment Part II. File a tax amendment   The Morenos have no adjustments to their USVI income, so they enter zero (-0-) on line 28, and $6,700 on line 29. File a tax amendment Their USVI adjusted gross income (AGI) is $6,700. File a tax amendment Part III. File a tax amendment   On line 30, the Morenos enter the amount from Form 1040, line 61 ($4,539). File a tax amendment Their Form 1040 does not show any entries required on line 31, so they leave that line blank and enter $4,539 on line 32. File a tax amendment   The Morenos enter their worldwide AGI, $54,901 (Form 1040, line 38), on line 33. File a tax amendment Next, they find what percentage of their AGI is from USVI sources ($6,700 ÷ $54,901 = 0. File a tax amendment 122) and enter that as a decimal on line 34. File a tax amendment They then apply that percentage to the U. File a tax amendment S. File a tax amendment tax entered on line 32 to find the amount of U. File a tax amendment S. File a tax amendment tax allocated to USVI income ($4,539 x 0. File a tax amendment 122 = $554), and enter that amount on line 35. File a tax amendment Part IV. File a tax amendment   Part IV is used to show payments of income tax to the USVI only. File a tax amendment The Morenos had no tax withheld by the U. File a tax amendment S. File a tax amendment Virgin Islands, but made estimated tax payments to the USVI of $400, which they entered on lines 37 and 39. File a tax amendment They include this amount ($400) in the total payments on Form 1040, line 72. File a tax amendment On the dotted line next to the entry space for line 72, they enter “Form 8689” and show the amount. File a tax amendment The Morenos do not complete Form 1116 because they receive credit on Form 1040, line 72, for the tax paid to the USVI. File a tax amendment   The income tax they owe to the USVI ($154) is shown on Form 8689, line 44. File a tax amendment They enter this amount on line 45. File a tax amendment They also include this additional amount ($154) on the dotted line next to the entry space and in the total on Form 1040, line 72. File a tax amendment The Morenos will pay their USVI tax at the same time they file the copy of their U. File a tax amendment S. File a tax amendment income tax return with the U. File a tax amendment S. File a tax amendment Virgin Islands. File a tax amendment This image is too large to be displayed in the current screen. File a tax amendment Please click the link to view the image. File a tax amendment Form 4563, page 1 for John Black This image is too large to be displayed in the current screen. File a tax amendment Please click the link to view the image. File a tax amendment Form 5074, for Tracy Grey This image is too large to be displayed in the current screen. File a tax amendment Please click the link to view the image. File a tax amendment Form 8689, page 1 for Juan and Carla Moreno Prev  Up  Next   Home   More Online Publications
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IRS Releases the Dirty Dozen Tax Scams for 2012

IR-2012-23, Feb. 16, 2012

WASHINGTON –– The Internal Revenue Service today issued its annual “Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

The following is the Dirty Dozen tax scams for 2012:

Identity Theft

Topping this year’s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
 
An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized. 

The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.  Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit.  For more information, visit the special identity theft page at www.IRS.gov/identitytheft

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.  The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

  • Do not sign the return or place a Preparer Tax identification Number on it.
  • Do not give you a copy of your tax return.
  • Promise larger than normal tax refunds.
  • Charge a percentage of the refund amount as preparation fee.
  • Require you to split the refund to pay the preparation fee.
  • Add forms to the return you have never filed before.
  • Encourage you to place false information on your return, such as false income, expenses and/or credits.

For advice on how to find a competent tax professional, see  Tips for Choosing a Tax Preparer.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
 
Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return. 

Beware. Intentional mistakes of this kind can result in a $5,000 penalty.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions.  This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution. 

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
 

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Page Last Reviewed or Updated: 11-Feb-2014

The File A Tax Amendment

File a tax amendment Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. File a tax amendment More information. File a tax amendment Exception—Community Income. File a tax amendment Exception—Qualified joint venture. File a tax amendment More information. File a tax amendment More information. File a tax amendment Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. File a tax amendment Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. File a tax amendment Table 1 can help you learn what those responsibilities are. File a tax amendment Ask yourself each question listed in the table, then see the related discussion to find the answer. File a tax amendment In addition to knowing about federal taxes, you need to make some basic business decisions. File a tax amendment Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. File a tax amendment For information on how to contact the SBA, see How to Get More Information, later. File a tax amendment Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. File a tax amendment When beginning a business, you must decide which form of business to use. File a tax amendment Legal and tax considerations enter into this decision. File a tax amendment Only tax considerations are discussed in this publication. File a tax amendment Your form of business determines which income tax return form you have to file. File a tax amendment See Table 2 to find out which form you have to file. File a tax amendment Sole proprietorships. File a tax amendment   A sole proprietorship is an unincorporated business that is owned by one individual. File a tax amendment It is the simplest form of business organization to start and maintain. File a tax amendment The business has no existence apart from you, the owner. File a tax amendment Its liabilities are your personal liabilities. File a tax amendment You undertake the risks of the business for all assets owned, whether or not used in the business. File a tax amendment You include the income and expenses of the business on your personal tax return. File a tax amendment More information. File a tax amendment   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. File a tax amendment If you are a farmer, see Publication 225, Farmer's Tax Guide. File a tax amendment Partnerships. File a tax amendment   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. File a tax amendment Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. File a tax amendment   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. File a tax amendment , from its operations, but it does not pay income tax. File a tax amendment Instead, it “passes through” any profits or losses to its partners. File a tax amendment Each partner includes his or her share of the partnership's items on his or her tax return. File a tax amendment More information. File a tax amendment   For more information on partnerships, see Publication 541, Partnerships. File a tax amendment Husband and wife business. File a tax amendment   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. File a tax amendment Do not use Schedule C or C-EZ. File a tax amendment Instead, file Form 1065, U. File a tax amendment S. File a tax amendment Return of Partnership Income. File a tax amendment For more information, see Publication 541, Partnerships. File a tax amendment Exception—Community Income. File a tax amendment   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. File a tax amendment S. File a tax amendment possession, you can treat the business either as a sole proprietorship or a partnership. File a tax amendment The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. File a tax amendment A change in your reporting position will be treated as a conversion of the entity. File a tax amendment Exception—Qualified joint venture. File a tax amendment   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. File a tax amendment Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. File a tax amendment For an explanation of "material participation," see the Instructions for Schedule C, line G. File a tax amendment   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. File a tax amendment Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. File a tax amendment For more information, see Qualified Joint Venture in the Instructions for Schedule SE. File a tax amendment Corporations. File a tax amendment   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. File a tax amendment A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. File a tax amendment A corporation can also take special deductions. File a tax amendment   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. File a tax amendment However, shareholders cannot deduct any loss of the corporation. File a tax amendment More information. File a tax amendment   For more information on corporations, see Publication 542, Corporations. File a tax amendment S corporations. File a tax amendment   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. File a tax amendment Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. File a tax amendment On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. File a tax amendment More information. File a tax amendment   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. File a tax amendment S. File a tax amendment Income Tax Return for an S Corporation. File a tax amendment Limited liability company. File a tax amendment   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. File a tax amendment The members of an LLC are not personally liable for its debts. File a tax amendment An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. File a tax amendment 7701-3. File a tax amendment For more information, see the instructions for Form 8832, Entity Classification Election. File a tax amendment Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. File a tax amendment The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). File a tax amendment An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. File a tax amendment An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. File a tax amendment You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. File a tax amendment You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. File a tax amendment This includes returns or documents filed to report the following information. File a tax amendment Interest, dividends, royalties, etc. File a tax amendment , paid to you. File a tax amendment Any amount paid to you as a dependent care provider. File a tax amendment Certain other amounts paid to you that total $600 or more for the year. File a tax amendment If you do not furnish your identification number as required, you may be subject to penalties. File a tax amendment See Penalties, later. File a tax amendment Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. File a tax amendment If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. File a tax amendment Applying for an EIN. File a tax amendment   You may apply for an EIN: Online—Click on the EIN link at www. File a tax amendment irs. File a tax amendment gov/businesses/small. File a tax amendment The EIN is issued immediately once the application information is validated. File a tax amendment By telephone at 1-800-829-4933. File a tax amendment By mailing or faxing Form SS-4, Application for Employer Identification Number. File a tax amendment When to apply. File a tax amendment   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. File a tax amendment If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. File a tax amendment If you apply by telephone or through the IRS website, you can get an EIN immediately. File a tax amendment If you apply by fax, you can get an EIN within 4 business days. File a tax amendment   If you do not receive your EIN by the time a return is due, file your return anyway. File a tax amendment Write “Applied for” and the date you applied for the number in the space for the EIN. File a tax amendment Do not use your social security number as a substitute for an EIN on your tax returns. File a tax amendment More than one EIN. File a tax amendment   You should have only one EIN. File a tax amendment If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. File a tax amendment Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. File a tax amendment The IRS will tell you which number to use. File a tax amendment More information. File a tax amendment   For more information about EINs, see Publication 1635, Understanding Your EIN. File a tax amendment Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). File a tax amendment The forms used to report these payments must include the payee's identification number. File a tax amendment Employee. File a tax amendment   If you have employees, you must get an SSN from each of them. File a tax amendment Record the name and SSN of each employee exactly as they are shown on the employee's social security card. File a tax amendment If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. File a tax amendment This may occur, for example, if the employee's name has changed due to marriage or divorce. File a tax amendment   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. File a tax amendment This form is available at SSA offices or by calling 1-800-772-1213. File a tax amendment It is also available from the SSA website at www. File a tax amendment ssa. File a tax amendment gov. File a tax amendment Other payee. File a tax amendment   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. File a tax amendment If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. File a tax amendment   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. File a tax amendment This form is available from IRS offices or by calling 1-800-829-3676. File a tax amendment It is also available from the IRS website at IRS. File a tax amendment gov. File a tax amendment    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. File a tax amendment For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. File a tax amendment Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. File a tax amendment A tax year is usually 12 consecutive months. File a tax amendment There are two kinds of tax years. File a tax amendment Calendar tax year. File a tax amendment A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. File a tax amendment Fiscal tax year. File a tax amendment A fiscal tax year is 12 consecutive months ending on the last day of any month except December. File a tax amendment A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. File a tax amendment If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. File a tax amendment You must use a calendar tax year if: You keep no books. File a tax amendment You have no annual accounting period. File a tax amendment Your present tax year does not qualify as a fiscal year. File a tax amendment You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. File a tax amendment For more information, see Publication 538, Accounting Periods and Methods. File a tax amendment First-time filer. File a tax amendment   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. File a tax amendment You adopt a tax year by filing your first income tax return using that tax year. File a tax amendment You have not adopted a tax year if you merely did any of the following. File a tax amendment Filed an application for an extension of time to file an income tax return. File a tax amendment Filed an application for an employer identification number. File a tax amendment Paid estimated taxes for that tax year. File a tax amendment Changing your tax year. File a tax amendment   Once you have adopted your tax year, you may have to get IRS approval to change it. File a tax amendment To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. File a tax amendment You may have to pay a fee. File a tax amendment For more information, see Publication 538. File a tax amendment Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. File a tax amendment You choose an accounting method for your business when you file your first income tax return. File a tax amendment There are two basic accounting methods. File a tax amendment Cash method. File a tax amendment Under the cash method, you report income in the tax year you receive it. File a tax amendment You usually deduct or capitalize expenses in the tax year you pay them. File a tax amendment Accrual method. File a tax amendment Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. File a tax amendment You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. File a tax amendment For other methods, see Publication 538. File a tax amendment If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. File a tax amendment Inventories include goods held for sale in the normal course of business. File a tax amendment They also include raw materials and supplies that will physically become a part of merchandise intended for sale. File a tax amendment Inventories are explained in Publication 538. File a tax amendment Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. File a tax amendment For more information, see Publication 538. File a tax amendment You must use the same accounting method to figure your taxable income and to keep your books. File a tax amendment Also, you must use an accounting method that clearly shows your income. File a tax amendment In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. File a tax amendment An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. File a tax amendment More than one business. File a tax amendment   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. File a tax amendment You must keep a complete and separate set of books and records for each business. File a tax amendment Changing your method of accounting. File a tax amendment   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. File a tax amendment A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. File a tax amendment For examples of changes that require approval and information on how to get approval for the change, see Publication 538. File a tax amendment Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. File a tax amendment The following are the four general kinds of business taxes. File a tax amendment Income tax. File a tax amendment Self-employment tax. File a tax amendment Employment taxes. File a tax amendment Excise taxes. File a tax amendment See Table 2 for the forms you file to report these taxes. File a tax amendment You may want to get Publication 509. File a tax amendment It has tax calendars that tell you when to file returns and make tax payments. File a tax amendment Income Tax All businesses except partnerships must file an annual income tax return. File a tax amendment Partnerships file an information return. File a tax amendment Which form you use depends on how your business is organized. File a tax amendment See Table 2 to find out which return you have to file. File a tax amendment The federal income tax is a pay-as-you-go tax. File a tax amendment You must pay the tax as you earn or receive income during the year. File a tax amendment An employee usually has income tax withheld from his or her pay. File a tax amendment If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. File a tax amendment If you are not required to make estimated tax payments, you may pay any tax due when you file your return. File a tax amendment Table 2. File a tax amendment Which Forms Must I File? IF you are a. File a tax amendment . File a tax amendment . File a tax amendment   THEN you may be liable for. File a tax amendment . File a tax amendment . File a tax amendment   Use Form. File a tax amendment . File a tax amendment . File a tax amendment Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. File a tax amendment 2 Various other schedules may be needed. File a tax amendment Estimated tax. File a tax amendment   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. File a tax amendment Sole proprietors, partners, and S corporation shareholders. File a tax amendment   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. File a tax amendment Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. File a tax amendment For more information, see Publication 505, Tax Withholding and Estimated Tax. File a tax amendment Corporations. File a tax amendment   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. File a tax amendment Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. File a tax amendment You must deposit the payments as explained later under Depositing Taxes. File a tax amendment For more information, see Publication 542. File a tax amendment Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. File a tax amendment Your payments of SE tax contribute to your coverage under the social security system. File a tax amendment Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. File a tax amendment You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. File a tax amendment Your net earnings from self-employment were $400 or more. File a tax amendment You had church employee income of $108. File a tax amendment 28 or more. File a tax amendment Use Schedule SE (Form 1040) to figure your SE tax. File a tax amendment For more information, see Publication 334, Tax Guide for Small Business. File a tax amendment You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. File a tax amendment The Social Security Administration (SSA) time limit for posting self-employment income. File a tax amendment   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. File a tax amendment If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. File a tax amendment The SSA will not change its records to increase your self-employment income. File a tax amendment Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. File a tax amendment Employment taxes include the following. File a tax amendment Social security and Medicare taxes. File a tax amendment Federal income tax withholding. File a tax amendment Federal unemployment (FUTA) tax. File a tax amendment If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. File a tax amendment If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. File a tax amendment These publications explain your tax responsibilities as an employer. File a tax amendment If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. File a tax amendment That publication has information to help you determine whether an individual is an employee or an independent contractor. File a tax amendment If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. File a tax amendment An independent contractor is someone who is self-employed. File a tax amendment Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. File a tax amendment Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. File a tax amendment To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. File a tax amendment Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). File a tax amendment Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. File a tax amendment Medicare tax pays for benefits under the hospital insurance part of FICA. File a tax amendment You withhold part of these taxes from your employee's wages and you pay a part yourself. File a tax amendment To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. File a tax amendment Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. File a tax amendment (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. File a tax amendment ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. File a tax amendment You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. File a tax amendment You pay FUTA tax only from your own funds. File a tax amendment Employees do not pay this tax or have it withheld from their pay. File a tax amendment Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. File a tax amendment See Publication 15 to find out if you can use this form. File a tax amendment Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. File a tax amendment Form I-9. File a tax amendment   You must verify that each new employee is legally eligible to work in the United States. File a tax amendment Both you and the employee must complete the U. File a tax amendment S. File a tax amendment Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. File a tax amendment You can get the form from USCIS offices or from the USCIS website at www. File a tax amendment uscis. File a tax amendment gov. File a tax amendment Call the USCIS at 1-800-375-5283 for more information about your responsibilities. File a tax amendment Form W-4. File a tax amendment   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. File a tax amendment You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. File a tax amendment For more information, see Publication 15. File a tax amendment Employees claiming more than 10 withholding allowances. File a tax amendment   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. File a tax amendment See section 16 of Publication 15. File a tax amendment Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. File a tax amendment You must also send copies to the Social Security Administration. File a tax amendment See Information Returns, later, for more information on Form W-2. File a tax amendment Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. File a tax amendment Manufacture or sell certain products. File a tax amendment Operate certain kinds of businesses. File a tax amendment Use various kinds of equipment, facilities, or products. File a tax amendment Receive payment for certain services. File a tax amendment For more information on excise taxes, see Publication 510, Excise Taxes. File a tax amendment Form 720. File a tax amendment   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. File a tax amendment Environmental taxes. File a tax amendment Communications and air transportation taxes. File a tax amendment Fuel taxes. File a tax amendment Tax on the first retail sale of heavy trucks, trailers, and tractors. File a tax amendment Manufacturers taxes on the sale or use of a variety of different articles. File a tax amendment Form 2290. File a tax amendment   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. File a tax amendment The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. File a tax amendment Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. File a tax amendment For more information, see the instructions for Form 2290. File a tax amendment Form 730. File a tax amendment   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. File a tax amendment Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. File a tax amendment Form 11-C. File a tax amendment   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. File a tax amendment Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. File a tax amendment Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). File a tax amendment Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. File a tax amendment Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. File a tax amendment Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. File a tax amendment The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. File a tax amendment You must give a copy of each information return you are required to file to the recipient or payer. File a tax amendment In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. File a tax amendment For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. File a tax amendment Form 1099-MISC. File a tax amendment   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. File a tax amendment These payments include the following items. File a tax amendment Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. File a tax amendment Rent payments of $600 or more, other than rents paid to real estate agents. File a tax amendment Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. File a tax amendment Royalty payments of $10 or more. File a tax amendment Payments to certain crew members by operators of fishing boats. File a tax amendment You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. File a tax amendment Form W-2. File a tax amendment   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. File a tax amendment For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. File a tax amendment Form 8300. File a tax amendment   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. File a tax amendment Cash includes U. File a tax amendment S. File a tax amendment and foreign coin and currency. File a tax amendment It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. File a tax amendment For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). File a tax amendment Penalties The law provides penalties for not filing returns or paying taxes as required. File a tax amendment Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. File a tax amendment Failure to file tax returns. File a tax amendment   If you do not file your tax return by the due date, you may have to pay a penalty. File a tax amendment The penalty is based on the tax not paid by the due date. File a tax amendment See your tax return instructions for more information about this penalty. File a tax amendment Failure to pay tax. File a tax amendment   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. File a tax amendment For more information, see your tax return instructions. File a tax amendment Failure to withhold, deposit, or pay taxes. File a tax amendment   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. File a tax amendment You may also be subject to penalties if you deposit the taxes late. File a tax amendment For more information, see Publication 15. File a tax amendment Failure to follow information reporting requirements. File a tax amendment   The following penalties apply if you are required to file information returns. File a tax amendment For more information, see the General Instructions for Certain Information Returns. File a tax amendment Failure to file information returns. File a tax amendment A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. File a tax amendment Failure to furnish correct payee statements. File a tax amendment A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. File a tax amendment Waiver of penalty. File a tax amendment   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. File a tax amendment   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. File a tax amendment (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. File a tax amendment ) Failure to supply taxpayer identification number. File a tax amendment   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. File a tax amendment You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. File a tax amendment Business Expenses You can deduct business expenses on your income tax return. File a tax amendment These are the current operating costs of running your business. File a tax amendment To be deductible, a business expense must be both ordinary and necessary. File a tax amendment An ordinary expense is one that is common and accepted in your field of business, trade, or profession. File a tax amendment A necessary expense is one that is helpful and appropriate for your business, trade, or profession. File a tax amendment An expense does not have to be indispensable to be considered necessary. File a tax amendment The following are brief explanations of some expenses that are of interest to people starting a business. File a tax amendment There are many other expenses that you may be able to deduct. File a tax amendment See your form instructions and Publication 535, Business Expenses. File a tax amendment Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. File a tax amendment Your business start-up costs will depend on the type of business you are starting. File a tax amendment They may include costs for advertising, travel, surveys, and training. File a tax amendment These costs are generally capital expenses. File a tax amendment You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). File a tax amendment You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. File a tax amendment The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. File a tax amendment Any remaining cost must be amortized. File a tax amendment For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. File a tax amendment Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. File a tax amendment You must spread the cost over more than one tax year and deduct part of it each year. File a tax amendment This method of deducting the cost of business property is called depreciation. File a tax amendment Business property you must depreciate includes the following items. File a tax amendment Office furniture. File a tax amendment Buildings. File a tax amendment Machinery and equipment. File a tax amendment You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. File a tax amendment This deduction is known as the “section 179 deduction. File a tax amendment ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. File a tax amendment Depreciation must be taken in the year it is allowable. File a tax amendment Allowable depreciation not taken in a prior year cannot be taken in the current year. File a tax amendment If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. File a tax amendment S. File a tax amendment Individual Income Tax Return, or by changing your accounting method. File a tax amendment For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. File a tax amendment Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. File a tax amendment Even then, your deduction may be limited. File a tax amendment To qualify to claim expenses for business use of your home, you must meet both the following tests. File a tax amendment Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. File a tax amendment Exclusive use. File a tax amendment   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. File a tax amendment The area used for business can be a room or other separately identifiable space. File a tax amendment The space does not need to be marked off by a permanent partition. File a tax amendment   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. File a tax amendment Exceptions to exclusive use. File a tax amendment   You do not have to meet the exclusive use test if either of the following applies. File a tax amendment You use part of your home for the storage of inventory or product samples. File a tax amendment You use part of your home as a daycare facility. File a tax amendment For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). File a tax amendment Principal place of business. File a tax amendment   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. File a tax amendment You use it exclusively and regularly for administrative or management activities of your trade or business. File a tax amendment You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. File a tax amendment   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. File a tax amendment The relative importance of the activities performed at each location. File a tax amendment If the relative importance factor does not determine your principal place of business, the time spent at each location. File a tax amendment    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. File a tax amendment However, for other ways to qualify to deduct home office expenses, see Publication 587. File a tax amendment Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. File a tax amendment If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. File a tax amendment More information. File a tax amendment   For more information about business use of your home, see Publication 587. File a tax amendment Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. File a tax amendment You generally can deduct either your actual expenses or the standard mileage rate. File a tax amendment Actual expenses. File a tax amendment   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. File a tax amendment You can divide your expenses based on the miles driven for each purpose. File a tax amendment Example. File a tax amendment You are the sole proprietor of a flower shop. File a tax amendment You drove your van 20,000 miles during the year. File a tax amendment 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. File a tax amendment You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. File a tax amendment Standard mileage rate. File a tax amendment   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. File a tax amendment You can use the standard mileage rate for a vehicle you own or lease. File a tax amendment The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. File a tax amendment It is announced annually by the IRS. File a tax amendment To figure your deduction, multiply your business miles by the standard mileage rate for the year. File a tax amendment    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. File a tax amendment However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. File a tax amendment Choosing the standard mileage rate. File a tax amendment   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. File a tax amendment In later years, you can choose to use either the standard mileage rate or actual expenses. File a tax amendment   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). File a tax amendment Additional information. File a tax amendment   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. File a tax amendment Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. File a tax amendment It also explains how long you must keep your records for federal tax purposes. File a tax amendment A sample recordkeeping system is illustrated at the end of this part. File a tax amendment Why Keep Records? Everyone in business must keep records. File a tax amendment Good records will help you do the following. File a tax amendment Monitor the progress of your business. File a tax amendment   You need good records to monitor the progress of your business. File a tax amendment Records can show whether your business is improving, which items are selling, or what changes you need to make. File a tax amendment Good records can increase the likelihood of business success. File a tax amendment Prepare your financial statements. File a tax amendment   You need good records to prepare accurate financial statements. File a tax amendment These include income (profit and loss) statements and balance sheets. File a tax amendment These statements can help you in dealing with your bank or creditors and help you manage your business. File a tax amendment An income statement shows the income and expenses of the business for a given period of time. File a tax amendment A balance sheet shows the assets, liabilities, and your equity in the business on a given date. File a tax amendment Identify source of receipts. File a tax amendment   You will receive money or property from many sources. File a tax amendment Your records can identify the source of your receipts. File a tax amendment You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. File a tax amendment Keep track of deductible expenses. File a tax amendment   You may forget expenses when you prepare your tax return unless you record them when they occur. File a tax amendment Prepare your tax returns. File a tax amendment   You need good records to prepare your tax returns. File a tax amendment These records must support the income, expenses, and credits you report. File a tax amendment Generally, these are the same records you use to monitor your business and prepare your financial statements. File a tax amendment Support items reported on tax returns. File a tax amendment   You must keep your business records available at all times for inspection by the IRS. File a tax amendment If the IRS examines any of your tax returns, you may be asked to explain the items reported. File a tax amendment A complete set of records will speed up the examination. File a tax amendment Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. File a tax amendment You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. File a tax amendment The business you are in affects the type of records you need to keep for federal tax purposes. File a tax amendment You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. File a tax amendment See Accounting Method, earlier. File a tax amendment If you are in more than one business, you should keep a complete and separate set of records for each business. File a tax amendment A corporation should keep minutes of board of directors' meetings. File a tax amendment Your recordkeeping system should include a summary of your business transactions. File a tax amendment This summary is ordinarily made in your books (for example, accounting journals and ledgers). File a tax amendment Your books must show your gross income, as well as your deductions and credits. File a tax amendment For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. File a tax amendment In addition, you must keep supporting documents, explained later. File a tax amendment Electronic records. File a tax amendment   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. File a tax amendment When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. File a tax amendment An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. File a tax amendment The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. File a tax amendment All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. File a tax amendment Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. File a tax amendment   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. File a tax amendment You still have the responsibility of retaining any other books and records that are required to be retained. File a tax amendment   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. File a tax amendment This test is not considered an examination and the results must be shared with you. File a tax amendment If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. File a tax amendment If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. File a tax amendment For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. File a tax amendment Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. File a tax amendment Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. File a tax amendment These documents contain information you need to record in your books. File a tax amendment It is important to keep these documents because they support the entries in your books and on your tax return. File a tax amendment Keep them in an orderly fashion and in a safe place. File a tax amendment For instance, organize them by year and type of income or expense. File a tax amendment Gross receipts. File a tax amendment   Gross receipts are the income you receive from your business. File a tax amendment You should keep supporting documents that show the amounts and sources of your gross receipts. File a tax amendment Documents that show gross receipts include the following. File a tax amendment Cash register tapes. File a tax amendment Bank deposit slips. File a tax amendment Receipt books. File a tax amendment Invoices. File a tax amendment Credit card charge slips. File a tax amendment Forms 1099-MISC. File a tax amendment Purchases. File a tax amendment   Purchases are the items you buy and resell to customers. File a tax amendment If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. File a tax amendment Your supporting documents should show the amount paid and that the amount was for purchases. File a tax amendment Documents for purchases include the following. File a tax amendment Canceled checks. File a tax amendment Cash register tape receipts. File a tax amendment Credit card sales slips. File a tax amendment Invoices. File a tax amendment These records will help you determine the value of your inventory at the end of the year. File a tax amendment See Publication 538 for information on methods for valuing inventory. File a tax amendment Expenses. File a tax amendment   Expenses are the costs you incur (other than purchases) to carry on your business. File a tax amendment Your supporting documents should show the amount paid and that the amount was for a business expense. File a tax amendment Documents for expenses include the following. File a tax amendment Canceled checks. File a tax amendment Cash register tapes. File a tax amendment Account statements. File a tax amendment Credit card sales slips. File a tax amendment Invoices. File a tax amendment Petty cash slips for small cash payments. File a tax amendment    A petty cash fund allows you to make small payments without having to write checks for small amounts. File a tax amendment Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. File a tax amendment Travel, transportation, entertainment, and gift expenses. File a tax amendment   Specific recordkeeping rules apply to these expenses. File a tax amendment For more information, see Publication 463. File a tax amendment Employment taxes. File a tax amendment   There are specific employment tax records you must keep. File a tax amendment For a list, see Publication 15. File a tax amendment Assets. File a tax amendment   Assets are the property, such as machinery and furniture you own and use in your business. File a tax amendment You must keep records to verify certain information about your business assets. File a tax amendment You need records to figure the annual depreciation and the gain or loss when you sell the assets. File a tax amendment Your records should show the following information. File a tax amendment When and how you acquired the asset. File a tax amendment Purchase price. File a tax amendment Cost of any improvements. File a tax amendment Section 179 deduction taken. File a tax amendment Deductions taken for depreciation. File a tax amendment Deductions taken for casualty losses, such as losses resulting from fires or storms. File a tax amendment How you used the asset. File a tax amendment When and how you disposed of the asset. File a tax amendment Selling price. File a tax amendment Expenses of sale. File a tax amendment   The following documents may show this information. File a tax amendment Purchase and sales invoices. File a tax amendment Real estate closing statements. File a tax amendment Canceled checks. File a tax amendment What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. File a tax amendment These include account statements prepared for the financial institution by a third party. File a tax amendment These account statements must be highly legible. File a tax amendment The following table lists acceptable account statements. File a tax amendment  IF payment is by. File a tax amendment . File a tax amendment . File a tax amendment THEN the statement must show the. File a tax amendment . File a tax amendment . File a tax amendment Check Check number. File a tax amendment Amount. File a tax amendment Payee's name. File a tax amendment Date the check amount was posted to the account by the financial institution. File a tax amendment Electronic funds transfer Amount transferred. File a tax amendment Payee's name. File a tax amendment Date the transfer was posted to the account by the financial institution. File a tax amendment Credit card Amount charged. File a tax amendment Payee's name. File a tax amendment Transaction date. File a tax amendment    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. File a tax amendment You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. File a tax amendment Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. File a tax amendment (Your business transactions are shown on the supporting documents just discussed. File a tax amendment ) Business transactions are ordinarily summarized in books called journals and ledgers. File a tax amendment You can buy them at your local stationery or office supply store. File a tax amendment A journal is a book where you record each business transaction shown on your supporting documents. File a tax amendment You may have to keep separate journals for transactions that occur frequently. File a tax amendment A ledger is a book that contains the totals from all of your journals. File a tax amendment It is organized into different accounts. File a tax amendment Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. File a tax amendment For example, a recordkeeping system for a small business might include the following items. File a tax amendment Business checkbook. File a tax amendment Daily summary of cash receipts. File a tax amendment Monthly summary of cash receipts. File a tax amendment Check disbursements journal. File a tax amendment Depreciation worksheet. File a tax amendment Employee compensation record. File a tax amendment The business checkbook is explained next. File a tax amendment The other items are illustrated later under Sample Record System. File a tax amendment The system you use to record business transactions will be more effective if you follow good recordkeeping practices. File a tax amendment For example, record expenses when they occur, and identify the source of recorded receipts. File a tax amendment Generally, it is best to record transactions on a daily basis. File a tax amendment Business checkbook. File a tax amendment   One of the first things you should do when you start a business is open a business checking account. File a tax amendment You should keep your business account separate from your personal checking account. File a tax amendment   The business checkbook is your basic source of information for recording your business expenses. File a tax amendment You should deposit all daily receipts in your business checking account. File a tax amendment You should check your account for errors by reconciling it. File a tax amendment See Reconciling the checking account, later. File a tax amendment   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. File a tax amendment You should also note on the deposit slip the source of the deposit and keep copies of all slips. File a tax amendment   You should make all payments by check to document business expenses. File a tax amendment Write checks payable to yourself only when making withdrawals from your business for personal use. File a tax amendment Avoid writing checks payable to cash. File a tax amendment If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. File a tax amendment If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. File a tax amendment    Use the business account for business purposes only. File a tax amendment Indicate the source of deposits and the type of expense in the checkbook. File a tax amendment Reconciling the checking account. File a tax amendment   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. File a tax amendment The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. File a tax amendment   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. File a tax amendment    You should reconcile your checking account each month. File a tax amendment     Before you reconcile your monthly bank statement, check your own figures. File a tax amendment Begin with the balance shown in your checkbook at the end of the previous month. File a tax amendment To this balance, add the total cash deposited during the month and subtract the total cash disbursements. File a tax amendment   After checking your figures, the result should agree with your checkbook balance at the end of the month. File a tax amendment If the result does not agree, you may have made an error in recording a check or deposit. File a tax amendment You can find the error by doing the following. File a tax amendment Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. File a tax amendment If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. File a tax amendment Adding the deposit amounts in your checkbook. File a tax amendment Compare that total with the monthly total in your cash receipt book, if you have one. File a tax amendment If the totals do not agree, check the individual amounts to find any errors. File a tax amendment   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. File a tax amendment   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. File a tax amendment Many banks print a reconciliation worksheet on the back of the statement. File a tax amendment   To reconcile your account, follow these steps. File a tax amendment Compare the deposits listed on the bank statement with the deposits shown in your checkbook. File a tax amendment Note all differences in the dollar amounts. File a tax amendment Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. File a tax amendment Note all differences in the dollar amounts. File a tax amendment Mark the check number in the checkbook as having cleared the bank. File a tax amendment After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. File a tax amendment Prepare a bank reconciliation. File a tax amendment One is illustrated later under Sample Record System. File a tax amendment Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. File a tax amendment At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. File a tax amendment If you still have differences, check the previous steps to find the errors. File a tax amendment   Table 3. File a tax amendment Period of Limitations IF you. File a tax amendment . File a tax amendment . File a tax amendment   THEN the period is. File a tax amendment . File a tax amendment . File a tax amendment 1. File a tax amendment Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. File a tax amendment Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. File a tax amendment File a fraudulent return   Not limited 4. File a tax amendment Do not file a return   Not limited 5. File a tax amendment File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. File a tax amendment File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. File a tax amendment The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. File a tax amendment You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. File a tax amendment Single-entry. File a tax amendment   A single-entry system is based on the income statement (profit or loss statement). File a tax amendment It can be a simple and practical system if you are starting a small business. File a tax amendment The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. File a tax amendment Double-entry. File a tax amendment   A double-entry bookkeeping system uses journals and ledgers. File a tax amendment Transactions are first entered in a journal and then posted to ledger accounts. File a tax amendment These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). File a tax amendment You close income and expense accounts at the end of each tax year. File a tax amendment You keep asset, liability, and net worth accounts open on a permanent basis. File a tax amendment   In the double-entry system, each account has a left side for debits and a right side for credits. File a tax amendment It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. File a tax amendment   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. File a tax amendment If the amounts do not balance, you have made an error and you must find and correct it. File a tax amendment   An example of a journal entry exhibiting a payment of rent in October is shown next. File a tax amendment General Journal Date Description of Entry Debit  Credit Oct. File a tax amendment 5 Rent expense 780. File a tax amendment 00     Cash   780. File a tax amendment 00                 Computerized System There are computer software packages you can use for recordkeeping. File a tax amendment They can be purchased in many retail stores. File a tax amendment These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. File a tax amendment If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. File a tax amendment To meet this qualification, the machine-sensible records must reconcile with your books and return. File a tax amendment These records must provide enough detail to identify the underlying source documents. File a tax amendment You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. File a tax amendment This documentation must be sufficiently detailed to show all of the following items. File a tax amendment Functions being performed as the data flows through the system. File a tax amendment Controls used to ensure accurate and reliable processing. File a tax amendment Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. File a tax amendment Charts of accounts and detailed account descriptions. File a tax amendment See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. File a tax amendment How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. File a tax amendment Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. File a tax amendment The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. File a tax amendment Table 3 contains the periods of limitations that apply to income tax returns. File a tax amendment Unless otherwise stated, the years refer to the period after the return was filed. File a tax amendment Returns filed before the due date are treated as filed on the due date. File a tax amendment Keep copies of your filed tax returns. File a tax amendment They help in preparing future tax returns and making computations if you file an amended return. File a tax amendment Employment taxes. File a tax amendment   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. File a tax amendment For more information about recordkeeping for employment taxes, see Publication 15. File a tax amendment Assets. File a tax amendment   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. File a tax amendment You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. File a tax amendment   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. File a tax amendment You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. File a tax amendment Records for nontax purposes. File a tax amendment   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. File a tax amendment For example, your insurance company or creditors may require you to keep them longer than the IRS does. File a tax amendment Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. File a tax amendment Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. File a tax amendment These sample records should not be viewed as a recommendation of how to keep your records. File a tax amendment They are intended only to show how one business keeps its records. File a tax amendment 1. File a tax amendment Daily Summary of Cash Receipts This summary is a record of cash sales for the day. File a tax amendment It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. File a tax amendment Henry takes the cash sales entry from his cash register tape. File a tax amendment If he had no cash register, he would simply total his cash sale slips and any other cash received that day. File a tax amendment He carries the total receipts shown in this summary for January 3 ($267. File a tax amendment 80), including cash sales ($263. File a tax amendment 60) and sales tax ($4. File a tax amendment 20), to the Monthly Summary of Cash Receipts. File a tax amendment Petty cash fund. File a tax amendment   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. File a tax amendment Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. File a tax amendment He sets up a fixed amount ($50) in his petty cash fund. File a tax amendment The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. File a tax amendment When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. File a tax amendment (See the Check Disbursements Journal entry for check number 92. File a tax amendment ) This restores the fund to its fixed amount of $50. File a tax amendment He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. File a tax amendment 2. File a tax amendment Monthly Summary of Cash Receipts This shows the income activity for the month. File a tax amendment Henry carries the total monthly net sales shown in this summary for January ($4,865. File a tax amendment 05) to his Annual Summary. File a tax amendment To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. File a tax amendment He cannot take a deduction for sales tax turned over to the state because he only collected the tax. File a tax amendment He does not include the tax in his income. File a tax amendment 3. File a tax amendment Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. File a tax amendment All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. File a tax amendment Frequent expenses have their own headings across the sheet. File a tax amendment He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. File a tax amendment Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. File a tax amendment Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. File a tax amendment If he did, he would record them in the journal, even though he could not deduct them as business expenses. File a tax amendment Henry carries the January total of expenses for materials ($1,083. File a tax amendment 50) to the Annual Summary. File a tax amendment Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. File a tax amendment , in the appropriate columns of that summary. File a tax amendment 4. File a tax amendment Employee Compensation Record This record shows the following information. File a tax amendment The number of hours Henry's employee worked in a pay period. File a tax amendment The employee's total pay for the period. File a tax amendment The deductions Henry withheld in figuring the employee's net pay. File a tax amendment The monthly gross payroll. File a tax amendment Henry carries the January gross payroll ($520) to the Annual Summary. File a tax amendment 5. File a tax amendment Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. File a tax amendment He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. File a tax amendment He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. File a tax amendment As in the journal, he keeps each major expense in a separate column. File a tax amendment Henry carries the cash receipts total shown in the annual summary ($47,440. File a tax amendment 9