A short overview of what you need to keep to support your deductions.
I know it isn’t tax time, but now is the time to think about getting and keeping our records safe and in some sort of order.
Whether you prepare your taxes yourself, pay one of the “big box” organizations to prepare them, have a CPA or go to someone in your neighborhood, YOU are the one responsible for producing the paperwork (records) to prove the deductions listed on your tax return.
So while you’re sitting in the comfort of the air-conditioning in order to beat the sweltering heat the US has been experiencing, let’s use some of that brain power and form a plan for yourself.
Let’s look at what the IRS says to do – always a good place to start when it comes to taxes:
- WHAT TO KEEP:
- Individuals (personal – not business): 1) Keep records that support items on your tax return for at least THREE years after that tax return has been FILED. (Examples include bills, credit card and other receipts, invoices, mileage logs, canceled (imaged or substitute checks) or other proof of payment, as well as any other records that support deductions or credits claimed.) 2) You should also keep records relating to property sold (or otherwise disposed of) for at least three years. In this case property can mean a home, home improvements, stocks, investments, IRA account transactions and RENTAL PROPERTY records.
- Business Owners: You need to keep everything an Individual has to keep, PLUS if you have employees, you need to keep ALL employment tax records for at least FOUR years after the tax becomes due or is paid. Also keep records showing your gross receipts (before expenses), proof of all purchases, expenses and assets. This includes cash register tapes, bank deposit slips (bank statements), receipt books, purchase and sales invoices, credit card charges and sales slips, canceled checks, petty cash slips , real estate closing statements and all Form 1099-MISC. They go on to say electronic records can include databases, saved files, e-mails, instant messages, faxes and voice messages….so if your proof is in an electronic format … find a way to keep it.
If you use some kind of bookkeeping software (Quick-Books or Quicken are the ones that come to mind), you need to keep track of your credit card transactions because the people who process those transactions are now required to report all the sales to the IRS.
This means you will (if you exceed the threshold) be receiving a Form 1099-K. It is reported on a separate line of your tax return.
I believe the IRS is attempting to crack down on income that isn’t being reported and, therefore, not being taxed.
- HOW TO KEEP RECORDS: The IRS says they don’t require you to keep your records in any particular manner, but they suggest you have a designated place.
This is a good idea because it does save time 1) for you when it comes time to have your taxes prepared 2) if the IRS does question an item on your return, you have a chance of finding it.
Now, the reality of the issue is many of our receipts are printed on thermal paper … which fades when exposed to light and/or heat. This means when it comes time to produce them as proof, you have a blank piece of paper. The examiner won’t care what you may have written on the paper, if he/she can’t read the printed information – you lose.
So, I’ve started scanning my receipts. I don’t have one of those new receipt scanners. As nice and fast as they are, I don’t want to spend the money so I use the one on my printer. It works just fine even if it is a little slow.
It is a little time consuming, BUT if you receive one of those “love” letters from the IRS saying you owe them money, you’ll be happy you did it.
The one thing I suggest you DON’T do is keep everything thrown in a box/bag with no order at all. I know the old story is that if the receipts are all jumbled up the examiner will give up and you win. This is no longer true.
They will not sort through the receipts (at least not much). If they can’t find what they are looking for in a reasonable period o time, they WILL give up, BUT they will also find against you …. meaning you lose, and you will owe some money.
No one wants that.
Find a method that works for you. Any filing system is better than no filing system.