In order to do your taxes, you’ll need to Keep detailed records of your income, expenses, and other information you report on your tax return. A complete set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.
There are several types of records that you should keep. Most experts believe it’s wise to keep most types of records for at least seven years, and some you should keep these records indefinately.
It is imperative that you keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.
Here’s a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:
While you’re storing your current year’s income and expense records, be sure to keep your bank account and loan records too, even though you don’t report them on your tax return. If the IRS believes you’ve underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be your saving grace.
One frequent question asked by tax payers is how long should they keep these records for. It is recommended that you keep the records of your current year’s income and expenses for as long as you may be called upon to prove the income or deduction if you’re audited.
For federal tax purposes, this is generally three years from the date you file your return (or the date it’s due, if that’s later), or two years from the date you actually pay the tax that’s due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:
1) You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2) You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years
3) You file a fraudulent return; keep records indefinitely.
4) You do not file a return; keep records indefinitely.
5) You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6) You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7) Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Another frequent question asked is if old tax returns should be kept, and if so for how long? The answer to this question again is a resounding yes.
One of the benefits of keeping your tax returns from year to year is that you can look at last year’s return while preparing this year’s. It’s a handy reference and reminds you of deductions you may have forgotten.
Another reason to keep your old tax returns is that there may be information in an old return that you need later.
Another reason to keep your tax returns is that if the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You’d think the IRS would have them handy, but that’s not the way it works. More than likely, your old returns are stored in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor’s request.
You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.
If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.
You’ll need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.
These tax records may include:
These records should be kept for as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.
There are other records you should keep, even though they don’t appear to have any use for your tax returns. Here are a few examples:
Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.
Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.
To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It’s also helpful to keep each year’s records separate and clearly labeled.
If you have your own business, or if you’re a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.
If you donate to a charity, you must have receipts to prove your donation and beginning in 2007, contributions in cash or by check aren’t deductible at all unless substantiated by one of the following:
Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.
Also, if you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.
If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.
If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.
It’s important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.
If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.
Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.
If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.
User | 4/11/2017