Tax Recordkeeping

Posted on Posted in Taxes

Which records should you keep? You should keep information that you and the IRS need to determine your correct tax. Everyone should keep the following records.

Copies of tax returns. Keep copies of your tax returns as part of your tax records.

  • Your tax returns can help you prepare future returns and amended returns.
  • After you die, copies of your tax returns and other records can be helpful to your survivors or the executor or administrator of your estate.

Proof of income and expenses. Listed below are examples of income and expense documents you should keep. The list is not all inclusive.

Income

  • Form(s) W-2, 1099, and K-1
  • Bank and brokerage statements
  • Business and hobby income records
  • Records relating to sale of business property

Expenses

  • Sales slips, invoices, receipts
  • Canceled checks or other proof of payment

Donations

  • Details of cash and noncash contributions
  • Written communications from qualified charities

Your Home

  • Closing statements, including any, refinance documents
  • Purchase and sales invoices
  • Receipts for improvements
  • Insurance records

Investments

  • Brokerage statements
  • Mutual fund statements
  • Form(s) 1099 and 2439
  • Other basis documentation

IRAs

  • Forms 1099-R, 5498, and 8606 for each year until all IRA funds have been distributed.

 

Records for Special Situations

Some items require specific files, in addition to the necessary records of income and expenses.

  • Alimony. If you pay or receive alimony, you will need to keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree. If you pay alimony, you need to know your former spouse’s Social Security number.
  • Business use of your home. Keep records that show which part of your home is used for business and the expenses related to that use. Child care providers should also keep track of hours open for business, as well as hours spent in preparation and clean up.
  • Gambling. Keep an accurate diary of winnings and losses. Required information includes date and type of gaming activity, gambling establishment name and address, and names of persons present with you and the amount you won or lost.
  • Tax credits. Each tax credit includes unique record requirements. Examples include the Provider’s name, address, and taxpayer ID number for the Child Tax Credit, Physician’s certification for the Credit for the Elderly or the Disabled, School records for the education credits.
  • Vehicle records. If you use your car for business, medical transportation, or qualifying volunteer work, keep a mileage log that includes the date, destination, and purpose of each trip. You also need to know how many miles you drove for other uses, such as commuting and personal use. Your vehicle records should include purchase or lease papers and loan records. You may receive a larger deduction if you keep records of gas purchases, maintenance costs, etc., in addition to mileage.  We recommend using the MileIQ app on your smartphone.

What is Proof of Payment?

The records you keep provide the documentation to support the deductions and expenses claimed on your tax return. You must always keep documentation of the reason for the payment. Other documents, such as statements and receipts, will help establish that the item is allowable on your tax return.

  • Cash-Amount, payee name, transaction date
  • Check-Check number, amount, payee’s name, date the check was posted to your account.
  • Debit or Credit Card-Amount charged, payee’s name, transaction date
  • Electronic Funds Transfer-Amount transferred, recipient’s name, date, the transfer was posted to your account
  • Payroll Deduction-Amount, payee code, purchase date
  • Account Statements.  Account statements from your financial institution are acceptable as proof if they provide the information shown above.
  • Pay Statements.   You may have deductible expenses withheld from your wages, such as union dues, medical insurance premiums, and charitable contributions. Keep year-end or final pay statements to prove payment of these items.
  • Mortgage Interest.  Form 1098, Mortgage Interest Statement, documents interest you paid. Be sure to verify that the amount is correct.

How Long Should You Keep Tax Records?

The IRS says you must keep your records for as long as they may be needed for the administration of any provision of the Internal Revenue Code, which means you must keep records of items shown on your return until the period of limitations for that return expires. The period of limitations is the time during which you can amend your return, claim credit, or be assessed additional tax by the IRS. The below lists some general guidelines.

  • If you owe additional tax, then three years after the return is filed.
  • If you omit income that is more than 25% of gross income on your return, then six years after the return is filed.
  • If you submit a fraudulent return, then unlimited.
  • If you don’t file a return, then endless.
  • If you file a claim for credit or refund after filing the original return, then later of three years, or two years after the tax was paid.
  • If you file an application for a loss from worthless securities, then seven years after the return is filed.
  • Note: A return that is filed early is treated as being filed on the due date of the return.

Asset Records

Keep records of the acquisition date and cost basis for each business or investment asset until the period of limitations expires for the year in which you dispose of the property. For example, suppose you sold a piece of business equipment in 2014, and you meet condition (1) above. You must then keep records of that asset until at least April 15, 2018 (three years after the due date for your 2014 tax return).

If you want to learn more about how we can serve your tax planning and preparation needs for your business and or personal returns, or if you would like general information about our business advisory and coaching services, we encourage you to contact us at 513-206-9673.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *