Tax filing season is fast approaching, and with it the usual headaches of how to file, what to deduct, when to file, and what to include. You can make the process a bit simpler though, if you keep good records over the year. Not only will keeping accurate and organized records make the entire tax process easier, it will also cover you if you ever get audited.
Why is Keeping Good Records Important?
- They are good to have when you need to look back for financial reasons.
- They are needed to prove to the IRS that you made proper deductions.
You may think that because of your income bracket you will never be audited, but that simply is not realistic. The IRS says it looks for so-called “red flags” when choosing whom to audit, but the process is actually done somewhat randomly — so you are always at risk of being audited.
What Records Are Best to Keep?
To be matter-of-fact, it is good to keep just about everything these days. You never know when a new deduction may pop up, and you never know what your tax professional may ask for. You also need these records to prove that a certain expense was indeed deductible.
It is good to keep detailed records of invoices, receipts, sales slips, and other written documentation that spells out exactly what you paid for over the last year. There are many other important deductions that you may want to consider keeping detailed records of, including alimony, charitable contributions, mortgage interest, childcare expenses, and real estate taxes.
Records will depend on an individual’s situation. If you are someone who makes or receives payments in cash, then make sure you get a detailed, dated, and signed receipt showing the amount of cash that traded hands.
Keep All of These Records
- Form W-2 & 1099
- Bank statements
- Brokerage and mutual fund statements
- Form K-1 (for partnerships)
- Sales slips
- Invoices
- Credit card receipts
- Canceled checks or other proof of payment
- Home purchase and sales agreements, closing statements, and insurance records
How Long Should I Keep My Tax Records?
This will vary from person to person. Some of you may choose to keep these tax records forever, while others may choose to throw them away after a few years.
The IRS destroys original tax returns after a three-year period, so legally you only need to keep your records for three-years before you can go ahead and shred them.
Even if you are going to get rid of your tax records, it is important to remember to keep a copy of your actual tax returns, W-2s, 1099s, etc., indefinitely. This is important info you may need to provide down the road, when it comes to things like Social Security.