[Note: this post is available as a PDF in the Toolkit section of this website]
As everyone knows, keeping accurate financial records is always a good idea. When it comes to preparing for filing taxes, having accurate and organized tax records will not only reduce the inevitable short-term stress but make you better prepared should the IRS come calling with tax issues. Do not wait until right before tax time to gather paperwork, but learn to keep your records organized throughout the year.
The end of the year is a good time for a quick review. Make sure you have all the paperwork together needed to file returns, especially to support deductions. Knowing where this information is, and having it readily available, will make it easier file and easier to put to bed any tax trouble/delinquent taxes that comes up.
Here are some general tax tips for keeping good tax records:
Tax Returns for Individuals or Couples
- Keep all your tax records in one designated place. This will save you time searching for important receipt or documents. Murphy’s Law says that the one record you won’t be able to locate is going to the one that is most important for you t find.
- If you are filing an individual tax return, the IRS recommends that you keep certain basic records for at least three years, which is the length of time that the IRS can go back and audit you. Keep your:
- Credit card statements and other receipts
- Mileage logs for any driving that you may want to claim as an expense
- Canceled checks or any other proof of payment
- Invoices for purchases
- Any other records that will document any deduction or credit you plan to claim on your return
- Also keep records relating to any property you own until at least three years after you sell, gift, transfer, dispose of the property in any way. Keep all your records about any real estate you purchase, whether your primary residence or an investment or vacation property. Keep organized records of home improvements you make, as you may be able to gain a tax benefit for your improvements when you sell your home. Any costs of maintaining or improving a rental property should be thoroughly documented.
- Records of any stock purchases or sales, as well as the purchase or sale of any other investments. It can be difficult or impossible for you to track down and prove the cost basis of an asset, if you don’t keep your records in order, and the capital gains tax on the sale of an asset is a type of item that the IRS commonly questions.
- Individual Retirement Arrangement transactions
- Keep copies of your filed tax returns, as they can be of great help if you need to amend a previous return. Past tax returns can also help you prepare tax returns for future years.
There are a few exceptions to the general rule to keep tax records for three years, according to the IRS, including:
- If you neglect to report income that you should report, and it is more than 25% of the gross income shown on your return, then you should keep records for 6 years.
- If you file a fraudulent return, you should keep your records indefinitely.
- If you do not file a tax return for a particular year, and you owe the IRS money, you should keep your records indefinitely.
Tax Returns for Small Business Owners
Tax record requirements for a business owner are different from the requirements for individuals, but the same basic principle applies: If you’re claiming something on your tax return, make sure that you can prove it. Small business owners who file a 1040 with their business expenses listed on a Schedule C are far likelier to get audited than either individuals filing a 1040 or S-corporations, This is one reason that many business people choose to open a corporation.
If you are a small business owner, the IRS recommends that you keep all your business and employment records for at least four years after the tax becomes due or you pay it, whichever is later.
The types of business paperwork you need to keep, if you own a business include:
- Receivables: All your gross receipts, whether from cash register tape records, bank deposit paperwork, receipt ledgers, all your invoices, log of all credit card receipts.
- Purchase: All canceled checks, credit card records and invoices.
- Expenses: All canceled checks, bank account statements, credit card records, invoices and all your petty cash slips.
- Assets: Receipts for all equipment purchases, capital investment or improvements in the business, property records for any real estate purchases.
The more complicated the tax returns, the more sense it makes to hire professional tax resolution services to prepare your return. Whether working on your own or with a tax professional, the neater and cleaner your tax records, the easier it is to prepare your return and the less likely it is that you are going to be audited. Partial tax records can come back to haunt you if you are audited. On the other hand, if you are audited and can provide the proof the IRS requests to back up what you claimed on your return, you reduce the likelihood of problems and needing help with the IRS.
The IRS offers a series of publications on its Web site that discuss in greater detail the proper way to keep tax records. You can review the following three IRS Publications, for more information about tax records:
- Publications 552, Recordkeeping for Individuals (http://www.irs.gov/pub/irs-pdf/p552.pdf)
- Publications 583, Starting a Business and Keeping Records (http://www.irs.gov/pub/irs-pdf/p583.pdf)
- Publication 463, Travel, Entertainment, Gift, and Car Expenses (http://www.irs.gov/pub/irs-pdf/p463.pdf)
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Jeffrey R. Siegel (Siegel Tax Law) understands tax statutes, case law, and I.R.S. procedures. He possesses, not only a doctorate in law and a post-doctorate LL.M. (Masters in Taxation) but a high degree of skill and success in securing the best obtainable results against the I.R.S. for his clients. He has practiced law for nearly 30 years and is licensed to practice in California, Colorado, Missouri, Kansas, and Maryland.