With tax time here, beware of oddities like IRA switches
The W-2s are coming! The W-2s are coming! By the millions, those flimsy little slips of paper that tell us how much money we made last year are invading our mailboxes and are being turned over to us at work. Now, we can get out our pencils, erasers, and calculators and begin the dreadful process known as ``doing our taxes.''
But before we begin, says Michele Bourgerie, a tax partner at Arthur Young & Co., the accounting firm, we should be aware of some strange glitches that can leap out at us along the tax preparation road.
One of the newest of these affects people who receive dividends from investments. Taxpayers may find they and the Internal Revenue Service have differing records about who paid the same dividend.
Say, for example, you hold stock in Gigantic International Corporation. Last year, you received $100 in dividends from your GIC stock. The check was written on GIC's account at Big Moneycenter National Bank.
When you fill out Schedule B and list that $100 dividend income, you put ``Gigantic International Corp.'' in the ``name of payer'' column, because that's where the money came from, right?
Wrong, at least to the IRS. As far as they're concerned, that $100 came from Big Moneycenter National Bank, because that's what it says on the 1099 information statement that was sent to the IRS. So if you don't put the bank's name on Schedule B, you are apt to get a letter from the IRS saying they have records of your receiving $100 that you didn't report.
``I have seen this simple error of not getting the right name [of dividend payers] on the tax return create months of correspondence between taxpayers and the IRS,'' Ms. Bourgerie says.
While you can prove -- eventually -- that you did report the income, the inconvenience can be avoided by putting the bank's name, as well as the name of the company, on Schedule B. Longer term, she says, the problem could be corrected by having 1099 forms list the name of the company, not the bank. But that change is up to the IRS, she adds.
Another problem that can come up because of conflicting records concerns individual retirement accounts (IRAs). If you move all or part of IRA assets from one place to another -- from a bank to a mutual fund, for example -- the trustee of the first account (the bank in this case) may report the transaction to the IRS as a distribution. If it were so, it would be what is known as a ``taxable event.'' It would also make you subject to penalties for early withdrawal from the IRA.
``The transaction is just a transfer, not a taxable event,'' Ms. Bourgerie notes. But because of the reporting error, you could be expected to pay taxes and a penalty for taking the money out early.
To avoid problems here, you should check with the first trustee to see how it recorded -- and reported -- the transaction. For your part, this is another argument for good recordkeeping. If you have statements and records to substantiate the claim, it will be easier to make your point with the IRS. Here again, however, you may be in for a period of correspondence with the tax collector.
While IRS computers are getting more adept at picking up discrepancies like conflicting information statements, the service is not equipped to do any more examinations or audits than in recent years, Ms. Bourgerie says. Less than 2 percent of all returns filed last year for 1983 taxes were examined, she said, and a high proportion of those were filed by upper-income people with a variety of investments, particularly tax shelters.
Even the possibility of an examination is another reason for keeping good records. The IRS says records that support an item of income or a deduction should be kept until the statute of limitations runs out. In most cases, this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later.
With some things, however, the IRS suggests you keep the records longer. If you use income averaging, for example, you'll need to prove your taxable income for the base years. Or, if there is property involved, such as a car or house, you'll need the records as long as they are needed to figure the cost basis of the property.
In a recently published tax book, however -- ``The Arthur Young Tax Guide 1985'' (Ballantine Books, New York, $6.95) -- the firm recommends that you keep tax returns permanently. Canceled checks should be kept for six years, as should all records relating to property after it is sold. `Risky' Ginnie Mae trusts?
I recently read a column where Ginnie Mae unit trusts were listed with several other investments the writer described as ``screwy'' and ``risky.'' As an investor in a Ginnie Mae unit trust recommended by my broker as a conservative investment, I was surprised to read such an opinion. What is your comment?-- R. B.
If you define risk as the possibility of losing your investment, these unit trusts of mortgages backed by the Government National Mortgage Association (``Ginnie Mae'') are very safe.
If, however, you define risk as the possibility of periodically receiving unexpected payments of principal and interest, instead of just interest as you expected, then there is some risk. Because people sell their homes, refinance the loans, or pay off mortgages early, you do receive prinicipal payments early.
A Ginnie Mae trust, then, should not be considered a reliable source of long-term income, but an investment that will provide an approximate rate of return for a few years. One way to keep the money coming longer is to look for trusts with a high proportion of lower-interest mortgages that are not as likely to be refinanced or paid off early.
If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.