Now that your income taxes have been filed, you need to know
how to keep good records in case you need to refer to them in the future. In
addition to the possibility of an IRS examination, tax records can also affect
future tax years' calculations and even be required to show income or document
ownership.
So, to keep sufficient tax records — but not so much as to
open yourself to additional liability — what should you do?
The IRS has a set period of time in which to assess tax (the
statute of limitations). Generally, this is three years after the due date (or
date the return was filed) as well as two years after you paid the tax. When
this statute of limitations expires, you generally can safely destroy records
that are now out of date.
The statute of limitations can be longer than three years,
though, for special circumstances. If you claim worthless securities for a
loss, you need to keep records for seven years. If you significantly
under-reported income, keep records for six years. And records of properties
claimed on your taxes should be kept for as long as you own the asset.
Of course, the storage of proper tax records can add up to a
lot of extra paperwork. If you do keep paper records, use a locked file cabinet
that's fireproof and within your control. Maintain records away from
potentially damaging elements like moisture, pests, and pets.
Fortunately, the IRS allows taxpayers to keep records
digitally as long as they meet the IRS's standards. This will save you a lot of
space and ensure that you don't lose your only copy of a document. However, if
you opt for digital storage, make sure the storage location is secure since it
will hold plenty of personal information.
Most taxpayers benefit from a two-part system that
duplicates hard copy files with digital versions. When the statute of
limitations comes, be sure to completely destroy both versions. Failure to
destroy records in a timely manner may lead to unnecessary liability if the IRS
does audit your files.
So, once you know how long to keep tax records, what should
you keep in that file? Of course, you should begin with full copies of your
state and federal tax returns and all accompanying schedules. If you used a tax
preparer, maintain record of their contact information in case you need to
request any information that they keep.
With that, include documentation showing how you reached
expenses or deductions — including child care expenses, tuition information,
and records of income. Did you claim business travel or entertainment?
Maintain receipts and statements that show the date,
location, attendees, and business purpose. Similarly, charitable deduction
records must show what was contributed, when, and how you valued it.
Special situations call for maintenance of more detailed tax
records. If you depreciated any business property, keep a file that shows what
you paid for the asset and any improvements you made. This is known as the
asset's basis, and it’s the foundation of depreciation deductions. If you had
employees, too, you'll also need more detailed records of any employment taxes
paid.
Not sure what is the statute of limitations for
any particular tax item you have? Don't know if your storage method complies
with the IRS? Or do you need help determining your state's record-keeping
requirements? Contact a qualified CPA or Enrolled Agent for more information.
At
Williams &
Associates Tax Services, our knowledgeable staff can help. Call today to make
an appointment.
