Are you someone who hastily searches for necessary documents or finds yourself rifling through your purse for old receipts when tax season comes? Are you uncertain which records you need to keep, and which you can toss? Then this might be the perfect article for you.
In this article, KerberRose will answer all your questions on tax recordkeeping—from what tax records to keep to how long you should keep them, and even how to store documentation properly.
Why Should You Keep Tax Records?
Keeping organized tax records is an important, albeit tedious, part of filing your taxes each year. However, some patience and decent organization can go a long way in saving you or your business headaches when tax season rolls around.
Make your life easier by organizing your recordkeeping system early and keeping it up to date year-round. Proper documentation and recordkeeping can ensure you receive earned deductions, and assist you in keeping track of income and expenses. Businesses especially should keep good tax records, as it will help owners keep track of deductible expenses and the basis of their property. Most importantly, good recordkeeping will provide support documentation for items listed on your tax return, meaning you can easily explain an item on your return if questioned by the IRS in an audit.
Thus, keeping accurate tax records ensures you receive all the credits or deductions for which you’re eligible, and prevents you from paying penalties for unsupported claims on your return.
The Most Common Tax Records for Individuals and Businesses
As an individual filer, you will want to be sure to keep these records or request copies if you can’t find them:
- W-2 and 1099 forms
- Bank statements
- Brokerage and mutual fund statements
- Expense tracking
- Health insurance records
- Mileage logs
- Property records, such as home purchase and sales agreements, closing statements, and insurance records
- Receipts showing cash contributions to charities
If you own a business, at tax time you will want to ensure you have proper documentation for gross receipts, purchases, expenses and assets, and any travel, transportation, entertainment, or gift expenses you incurred throughout the year.
The following are examples of these records:
- Account statements
- Asset documents, such as: purchase and sales invoices, real estate closing statements, and canceled checks or other documents verifying payee, amount, and proof of payment/electronic funds transfer
- Cash register tapes and receipts
- Cash and credit card sales
- Credit card receipts and statements
- Canceled checks or other documents showing proof of payment
- Employment taxes
- Forms 1099-MISC
- Hotel/lodging receipts, airline or transportation receipts, restaurant/meal receipts, entertainment receipts, gift receipts, and vehicle mileage logs. (For a complete list of deductible travel, entertainment, gift, or transportation expenses, review IRS Publication 463; this publication also has examples of how to keep proper logs of these detailed records.)
- Receipts showing cash contributions to charities
How Long You Should Keep Tax Records
Generally, you should keep tax records for three years from the date you file your income tax return, as this is how long the IRS has to audit your finances. This means you must keep documents—receipts, previous years’ tax returns, W-2s, and other records supporting an item of income on your return—for at least three years after filing.
There are exceptions to this rule, as the IRS has varying periods of limitation on tax assessment, depending on what and when you reported it. If you under-report your income by 25% or more, you can be audited for up to six years after filing. If you choose not to file, there is no time limit to when the IRS can approach you for an audit. So, it’s best to neatly categorize and keep records easily accessible, just in case the IRS does come knocking. Businesses should store all accounts of employment for at least four years.
With some records, consider holding onto copies even after the audit period has passed. Keep copies of your income tax return, W-2s and 1099s, and the IRS’s acceptance of your return for every year you file. Four years after you’ve filed is usually safe to destroy supporting documents—receipts and the like—however, hold onto the return itself and the IRS’s acknowledgment to store it in a safe place.
How to Store Tax Records
For easy filing, you should develop a secure and organized filing system. The new digital age has increased document storage security, and many records now get generated electronically. Still, you might have hard copies of receipts or canceled checks. Whether you choose digital or hard copies, you will need an organized system you understand and can easily access.
If you utilize digital records, ensure they are secure with encryptions and that you have backups. Scan hard copies of documentation for ease of organization. Use cloud-based storage or a flash drive for backup, in case of theft or lost data. Consider storing physical files in multiple locations (i.e., in a safe spot at work and home) in case one set of records gets misplaced or a natural disaster strikes. Make sure to protect hard copies in a water- and fireproof safe.
Additionally, categorizing your files by record type and tax year is an excellent way to stay organized and save time when preparing your taxes.
Tax Planning with KerberRose
Although tax season is often only thought of from January-April each year, it’s a good practice to be actively thinking about your taxes throughout the year. In addition to keeping good tax records, working with an accounting advisor on tax planning can create even more opportunities to capitalize on tax deductions or credits.
We urge taxpayers to meet with their advisor at least once outside tax season to plan for their return and to run scenarios to estimate their ideal tax outcome. KerberRose’s knowledgeable advisors have experience in various industries and tax situations to ensure both individuals and businesses can feel supported throughout the tax process, year-round.
Our advisors would love to help you plan for your taxes and advise on proper recordkeeping strategies. Reach out to a KerberRose Trusted Advisor to discuss your options ahead of tax season!