How Long Should You Keep Your Tax Records?

The length of time you should keep tax records depends on the action, expense, or event which the records will substantiate. Generally, you should keep records until the statute of limitations period for an audit or assessment of that tax return expires:

  • 3 YEARS from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
  • 4 YEARS for employment tax records, after the date that the tax becomes due or is paid, whichever is later
  • 6 YEARS if there is a chance that the IRS may allege that you under-reported more than 25% of the gross income shown on your return (i.e., a questionable deduction or tax exempt unreported income).
  • 7 YEARS if you filed a claim for a loss from worthless securities or bad debt deduction.
  • INDEFINITELY maintain a copy of your return, as well as any significant income or expense records that may be needed to defend a claim of an unfiled or fraudulent return, as there is no statute of limitations regarding such.

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 – i.e., insurance or creditor issues.

If you have any questions or would like further information, please contact James F. Mauro in the Lansing, Michigan office at 517-487-4701.

IRS General Counsel Opinion on Deductibility of Health Insurance Premiums Paid for Family Members of S Corporation Shareholders

The IRS recently issued a Chief Counsel Memorandum clarifying when a family member of a 2% shareholder in an S corporation is entitled to a deduction under Section 162(l) of the Internal Revenue Code (the “Code”) for health plan insurance premiums paid for coverage provided to the family member by the S corporation. Chief Counsel Memorandum 201912001 (March 22, 2019).

Background. For benefit plan purposes, a 2% or more shareholder of an S corporation is treated like a partner in a partnership. Therefore, if the 2% shareholder-employee is covered by a health plan of the S corporation, the S corporation will include the health insurance premiums paid in the shareholder’s income and they will be reported as income on Form W-2. To give the 2% shareholder equivalency with common law employees, the 2% shareholder is allowed to take an “above the line” deduction on his or her individual Form 1040 for the amounts paid by the S corporation for health insurance coverage for the shareholder-employee and his or her family members.

To meet the requirements for the deduction under Code Section 162(l), the health plan must be established by the S corporation. The plan is considered to be established by the S corporation if either:

  • The S corporation makes the premium payments for the health insurance policy; or
  • The 2% shareholder makes the insurance premium payments and the S corporation reimburses the shareholder upon receipt of proof of payment.

Issue Addressed by the IRS. The question posed to the IRS was whether a family member, who is deemed to own stock under the family attribution rules, is entitled to the deduction under Code Section 162(l) for the amount of the health insurance premiums paid on his or her behalf by the S corporation. The family attribution rules provide that an individual is deemed to own stock owned, directly or indirectly, by or for his or her spouse, children, grandchildren and parents.

For example, assume Father owns 100% of an S corporation. Daughter is employed by the S corporation and, under the family attribution rules, is deemed to own 100% of Father’s stock. Daughter is, therefore, considered to be a 2% shareholder. The S corporation provides a group health plan to all employees, including Daughter. The premiums paid by the S corporation on behalf of Daughter for the health plan coverage will be included on her Form W-2 as income.

In the Chief Counsel Memorandum, the IRS concluded that, if the conditions of Code Section 162(l) are met, Daughter is entitled to take a deduction on Form 1040 for the health plan premiums paid by the S corporation on her behalf.

This conclusion in the Chief Counsel Memorandum is welcome news for family members who work for S corporations owned by another family member, as they will be permitted to take the deduction for insurance premiums paid for health plan coverage that is included in their income.

A Chief Counsel Memorandum is written advice issued by the Office of Chief Counsel in response to an internal request for guidance from the IRS. It is not considered substantial authority or binding precedent, but provides insight on the IRS position on a particular issue. We recommend that you consult with qualified tax counsel on this or similar issues.

If you have questions, please contact Cynthia A. Moore at 248-433-7295 or any other member of Dickinson Wright’s Employee Benefits and Executive Compensation group.

IRS Expands Self-Correction Procedures for Retirement Plans

Certain qualified retirement plan errors are now easier to fix under the new expanded IRS self-correction procedures. On April 19, 2019, the IRS released the revised Employee Plans Compliance Resolution System (“EPCRS”) under Revenue Procedure 2019-9. EPCRS allows employers of all sizes to identify and correct retirement plan errors under the Self-Correction Program (“SCP”), Voluntary Correction Program (“VCP”) and Audit Closing Agreement Program (“Audit CAP”). While Revenue Procedure 2019-9 publishes a whole new EPCRS, the major changes impact the Self-Correction Program only. The expanded Self-Correction Program permits self-correction of the following three common retirement plan violations as long as certain conditions are satisfied:

  • Plan Document Failures
  • Plan Operation Failures
  • Plan Loan Failures

1. Plan Document Failures

Employers can now self-correct certain failures to adopt tax-reform or other required amendments by the IRS deadline. Before Revenue Procedure 2019-9, employers were forced to submit a VCP application, pay an IRS user fee, and obtain IRS approval in order to adopt a required plan amendment after the applicable IRS deadline. A failure to adopt an initial plan document (for a 401(k), 403(b) or other qualified plan) still cannot be corrected under SCP. Late discretionary amendments and eligibility changes are not considered plan document failures and still cannot be corrected retroactively under SCP.

In order to qualify for SCP to correct plan document failures, the following conditions must be satisfied:

  • Plan must have an IRS favorable determination letter (or IRS advisory opinion for pre-approved prototype or volume submitter plans); and
  • Correction must be made no later than the end of the second plan year after the plan year the amendment should have been adopted.

2. Plan Operation Failures

Under the expanded SCP, an employer may now amend plan terms to conform with prior plan operations. Previously, an employer could not retroactively amend plan terms to be consistent with plan operations without filing a VCP application. One example of how the expanded SCP could benefit an employer is where an employer permitted 401(k) plan participants to receive hardship withdrawals, but the plan document did not provide for hardship withdrawals. SCP is only available for plan operation errors if the following conditions are satisfied:

  • Plan amendment must result in the increase of a benefit, right or feature;
  • Increase must apply to all employee participants; and
  • Increase of the benefit, right or feature is permitted under the Internal Revenue Code and EPCRS correction principles.

3. Plan Loan Failures

Common loan failures such as loan defaults resulting in taxable deemed distributions or exceeding the plan maximum number of loans can now be corrected under SCP. For example, if loan repayments via payroll deduction started four (4) months following the participant’s loan receipt rather than immediately, a plan may now correct the default by reamortizing the outstanding loan balance or permitting a participant lump sum payment to bring the loan balance current to avoid a taxable distribution without filing a VCP application.

Certain loan failure corrections will require a retroactive plan amendment. For example, if a plan has a two-loan maximum but allowed participants to receive three loans, the plan document must be amended retroactively to change the maximum number of loans. The following conditions must be satisfied to correct a loan failure by retroactive plan amendment under SCP:

  • Plan amendment must satisfy statutory loan requirements under Code Section 72(p) and the qualification requirements of Code Section 401(a); and
  • Participant loans were available to either all participants or solely to one or more non-highly compensated employees.

Effective Date

  • The new EPCRS, including the expanded self-correction procedures, is effective April 19, 2019.

About the Author: Roberta Granadier is an attorney in Dickinson Wright’s Troy office, where she practices in the area of employee benefits law. She has extensive experience with benefits issues in corporate transactions, executive compensation, ESOPs and public retirement plans. Roberta can be reached at 248-433-7552 or and you can visit her bio here.