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Tackling tax recordkeeping

Stacks_of_documents_at_desk_1 As promised, it's time to look at tax recordkeeping.

"Wait," you're saying to your computer screen. "Didn't you just cover that last week?"

Thanks so much for remembering. But that dealt primarily with filing records in preparation for tax returns to come, specifically documentation for 1040s you'll submit next year.

This time we're talking records of tax returns past.

Obviously, the most critical piece of tax data is a copy of the return you sent to the IRS. This includes not just the 1040, but any schedules or other forms and addenda you filed.

Now to the information that you used to complete that form.

Keep in mind that in the tax world, there's no innocent until proven guilty. IRS rules expressly place the burden of proof on you, the taxpayer, meaning the tax examiner comes at you already convinced you cheated.

It's all up to you to convince him or her otherwise. To do this, you must have accurate and thorough records to support the income, expenses, dependents, deductions, credits and any other item you report on your return.

Basically, you want to keep any and everything you used to substantiate each entry on your return: W-2 and 1099 forms, canceled checks, receipts, sales slips, invoices and bank, brokerage and mutual fund statements.

Be sure to also include any worksheets you used to arrive at an entry on your return. If you use a computer program, these generally are included in your overall tax prep documents. Print them out with your copy of your return.

I use software and I print out the nicely typed worksheets. But during the filing process, I find myself scribbling notes and making computations on a legal pad, too. I drop those handwritten annotations in the box. I've never had to show my back-up material to an IRS auditor (knock wood!), but I have used them in subsequent years when facing a similar deduction or credit question.

Once my return is in Uncle Sam's hands, I take all my supporting documents and place them in one large folder or envelope. Some years, however, the amount of tax back-up material has required a box. I've found the shipping box from Amazon when I've ordered a couple of books is a perfect size for this. My filing closet has a special shelf for this material.

OK, you've got your data in order. Now how long does it have to take up valuable storage space?

Well, for your returns themselves, you'll want to hang onto them forever. Yes, for all time. For most of us, the 1040 and attachments aren't that overwhelming, so just make a space in your file cabinet and start sticking all your returns there. You'll be glad you have them when you apply for a mortgage and the lender wants to see the last 10 years of your tax returns.

I keep my actual return copies in a file drawer, separate from the box of back-up material. That way it's easier to get to the 1040s themselves when I need one, for reference or another financial transaction.

As for that supporting material, you need to hang onto it for at least as long as the IRS can come asking questions, which generally is three years. That's how long the agency has to investigate a return and as I noted here, it often uses as much of that time as it can. So definitely keep the documents you used to file a return for at least three years after you've submitted the 1040 itself.

Many tax pros, however, recommend you keep the material a little longer. The consensus: seven years.

Why hang onto filing material for more than twice as long as the agency has to review a return? Maybe it's because seven years is the longest review period the IRS officially puts in its material; see for yourself here.

But Eva Rosenberg, AKA TaxMama, offers some other reasons to hang onto tax documentation for a bit longer:

1) States might have longer statutes of limitations.
2) If the IRS discovers you didn't report all your income, it has six years to re-evaluate the shorted return.
3) And if you're depreciating something, take into consideration how long ago you bought it. The IRS can look to the original year the asset was placed into service.

Remember also, that if the IRS suspects tax fraud, there's absolutely no time limit on when it can come after you. The key word here is "suspects." You might not have been engaged in a fraudulent tax activity, but if one nit-picky examiner thinks something's hinky …

So that means you should never, ever get rid of any supporting tax data? No, but I had to point that out. Basically, if you hew to the three-to-seven year holding period, you should be OK.

Today's Tax Tip: In addition to the IRS's recordkeeping recommendations, covered in detail in Publication 552, check out these other, more interesting to read, thoughts on tax data:

The second life of shredded documents: When you do get rid of tax and personal financial documents, make sure you shred them to prevent identity thieves from usurping your life and money.

We spent 19 years in suburban Washington, D.C., so you can imagine how much stuff we accumulated. Although I hadn't planned on it, when we moved to Florida, some of that stuff that came with us included a couple of (large) boxes full of old financial documents.

I meant to get rid of them pre-move, but you know how hectic things get as your actual moving day nears. So the movers put them on the truck, then in our Florida home and I shoved them to the back of my office closet.

But last year, as we were getting ready to come back home to Texas, I was determined not to drag that stuff another 1,300 miles across the country.

Shredded_paper_2 So every day, February through April, the hubby and I would take turns removing staples (until we realized it was easier just to tear off the stapled corners) and shoving papers, receipts, statements, etc. through our shredder for as long as it would eat them. That was about 30 minutes at a time. After that point, the machine overheated and stopped. In an hour or so, we would start abusing it again.

Soon, we had half a dozen 33-gallon lawn trash bags full of shredded paper. Then it hit us. Use the shredding as packing material.

It's great cushioning and much cleaner than crumpled newspaper. With the shredding as padding, we were able to use less bubble wrap on our breakable items, meaning we saved some bucks. Bubble wrap is great and it's fun to pop, but it is so expensive.

It worked wonderfully. Not a broken glass or chipped knick-knack in any of our gazillion boxes. (And I'm sure the tchotchkes in that small box that North American somehow failed to deliver also made it through unscathed.)

The shredding is, of course, a mess to clean up when you pull things out of boxes, but that's a very small inconvenience for the service it provides.

And speaking of moving, here's one more tip.

Pack your favorite stuff first, because toward the end of the seemingly neverending process, every item, regardless of how dear it is to you, is going to get just a quick wrap of protective material and a prayer as you shove it in a box.


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Would you ever consider paying a trusted 3rd part to store your tax documents electronically? That way you don't have to haul around or store boxes of papers.

Please email me your responses. Thanks!

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