This post was reviewed and updated Friday, April 27, 2018.
I been on a tidying up kick of late.
As the before and after photos below show, I finally found my office's floor. The old material at left was filed or tossed. Mostly filed.
I also sorted through my grocery coupon collection. Fighting all my hoarder instincts, I threw out old ones, some I've had for decades, finally admitting I'd never use them.
I know the employees at my local grocery store will be happy that I won't be tempted by these old savings slips. When I did use a "no expiration date" coupon a couple of years ago, the kid at the cash register freaked out because it had no bar code to scan.
Thinning out tax records: When it comes to tax records, though, I still have a hard time letting go. But I'm trying.
My tax records are much better organized than other parts of my life. Still, I know I'm hanging onto to many documents.
So today's post is as much for me as you, dear readers. Here, in a five-point question and answer format, is a look at the whys, whats and how-longs of tax record keeping.
1. Why should I keep records?
Well-organized records make it easier to prepare your tax return. Documentation in good order also can help you provide answers if the Internal Revenue Service has any questions about your return.
2. What kinds of records should I keep?
Hang onto receipts, canceled checks, business logs, credit card statements and other documents that support the income you report or the deductions and credits you claim.
In some cases, photos also are helpful, such as when you claim property losses after going through a disaster. And since the IRS has embraced the 21st century, it accepts digital records.
Personally, even though I eventually toss out a lot of the material I used when I filed, I keep complete copies of our annual tax returns. When I'm feeling nostalgic, I can go back and peruse the first joint return the the hubby and I ever sent the IRS.
3. What kind of record keeping system should I use?
Except in a few cases, which generally are related to business operation, the law doesn't require you to use any special kind of record keeping system. You may choose any method as long as it clearly shows your income and expenses.
If you're happy using and have the space, fill up as many filing cabinets with tax records as you need. Or, as noted earlier, maintain your records on a flash drive or in the cloud.
4. What is the burden of proof?
Here's the fun part. Unlike the U.S. legal system, the burden of proving your tax innocence, or at least that the information on your Form 1040 is correct, falls on you, not Uncle Sam.
You are considered tax guilty until proven otherwise.
That means you, the taxpayer, must prove entries, deductions and statements made on your tax returns. Your thorough and well-organized records will help in this substantiation requirement.
5. How long should I keep records?
This is the question that flummoxes pack rats and well-adjusted taxpayers alike. As is the case with most tax questions, the answer is "it depends."
Generally, you must keep your tax records as long as they may be needed to prove the income or deductions on a tax return. But the length of time you should keep certain tax documents is based on the action, expense or event the documents record.
Myriad tax record limitation periods: Three years is the general time frame for run-of-the-mill annual tax returns. That's the limitation period for amending your return to claim a credit or refund or during which the IRS can assess additional tax.
If, however, you don't report income that you should and that amount of unreported money is more than 25 percent of the gross income shown on your return, then the IRS has a six-year look-back period.
The period of limitations is seven years if you file a claim for a loss from worthless securities.
When it comes to property, keep relevant records until the period of limitations expires for the year in which you dispose of the property. These records help figure your basis for computing gain or loss when you sell or otherwise dispose of the property.
Sometimes there's no limit: And if you're flat out lying to the IRS by filing a fraudulent return there is no limitation period. The federal tax collector can come after you at any time in this case.
There's also no limitation on the time the IRS can ask you questions if you don't file a tax return.
The bottom line is that if you're cheating the tax man and he gets wind of it, you're in trouble. Chances are you're not going to have enough records to convince him otherwise.
But in most cases, if your accurate return raises IRS eyebrows, having the proper and sufficient records will help ensure your follow-up with the IRS goes smoothly, quickly and in your favor.
Now about all those old grocery coupons. You're on your own!
You also might find these items of interest:
- Tax recordkeeping time
- How long to hang onto tax records
- The importance of good, and separate, business records