After tax day: Take these action steps

May 9, 2022

The April tax filing deadline has passed, but that doesn’t mean you should push your taxes out of your mind until next year. Here are three tax-related actions that you should consider taking in the near term (if you filed on time and didn’t file for an extension).

Retain the requisite records

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

Essential documentation to retain may include:

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

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

Plan for your 2022 taxes

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

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

If you make estimated tax payments throughout the year, consider reevaluating the amounts you pay. You might want to increase or reduce the payments on account of changes in self-employment income, investment income, Social Security benefits and other types of nonwage income. To preempt the risk of a penalty for underpayment of estimated tax, consider paying at least 90% of the tax for the current year or 100% of the tax shown on your prior year’s tax return, whichever amount is less.

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

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

If you itemize deductions on your tax return, you also might consider “bunching” expected medical expenses into 2022 to increase the odds that you can claim the medical and dental expense deduction. You’re allowed to deduct unreimbursed expenses that exceed 7.5% of your adjusted gross income. If you expect to have, for example, a knee replacement surgery next winter, accelerating it (and all of the follow-up appointments and physical therapy) into this year could put you over the 7.5% threshold.

Respond to an IRS question or audit

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

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

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

If you receive notification of a correspondence audit, you and your tax advisor should closely follow the instructions. You can request additional time if you can’t submit all documentation requested by the specified deadline. It’s advisable to submit copies instead of original documents, and each page of documentation should be marked with your name, Social Security number and the tax year under scrutiny.

Don’t ignore the letter. Doing so will eventually lead to the IRS disallowing the item(s) claimed and issuing a Notice of Deficiency (that is, a notice that a balance is due). You’ll then have 90 days to petition the U.S. Tax Court for review.

While correspondence audits are by far the most common, you could be selected for an office audit (in an IRS office) or field audit (at the taxpayer’s place of business). These are more intensive, and you should consult a tax professional with expertise in handling these types of exams.

Stay ahead of the game

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

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