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Recordkeeping for Tax Purposes

Which records should you keep? You should keep information that you and the IRS need to determine your correct tax. Everyone should keep the following records.

Copies of tax returns. Keep copies of your tax re- turns as part of your tax records. Your tax returns can help you prepare future returns and amended returns. After you die, copies of your tax returns and other records can be helpful to your survivors or the executor or administrator of your estate. Proof of income and expenses. Listed below are examples of income and expense documents you should keep. The list is not all inclusive.

Income
  • Form(s) W-2, 1099, and K-1
  • Bank and brokerage statements
  • Business and hobby income records
  • Records relating to sale of business property
Expenses
  • Sales slips, invoices, receipts
  • Canceled checks or other proof of payment
Donations
  • Details of cash and noncash contributions
  • Written communications from qualified charities
Your Home
  • Closing statements, including any refinance documents
  • Purchase and sales invoices
  • Receipts for improvements
  • Insurance records
Investments
  • Brokerage statements
  • Mutual fund statements
  • Form(s) 1099 and 2439
  • Other basis documentation
IRAs
  • Forms 1099-R, 5498, and 8606 for each year until all IRA funds have been distributed.

How Long Should You Keep Tax Records?

The IRS says you must keep your records for as long as they may be needed for the ad- ministration of any provision of the Internal Revenue Code, which means you must keep records of items shown on your return until the period of limitations for that return expires. The period of limitations is the time during which you can amend your return, claim a credit, or be assessed additional tax by the IRS. The chart below lists some general guidelines.

1 Owe additional tax, and conditions 2, 3, and 4, below, don't apply to you
2 Omit income that is more than 25% of gross income on your return
3 File a fraudulent return
4 Do not file a return
5 File a claim for credit or refund after filing an original return
6 File a claim for loss from worthless securities

Asset Records

Keep records of acquisition date and cost basis for each business or investment asset until the period of limitations expires for the year in which you dispose of the asset. For example, suppose you sold a piece of business equipment in 2009 and you meet condition (1) above. You must then keep records of that asset until at least April 15, 2013 (three years after the due date for your 2009 tax return).

Electronic Records

Paper records take up a lot of space, and they can fade or be damaged. Many people prefer to keep electronic records instead of paper records.

All requirements that apply to hard copy records apply to electronic records, including record retention periods.

If you scan or otherwise transfer your tax records to an electronic format, you must be able to store, preserve, retrieve, and reproduce the records in a legible, readable format.

Records for Special Situations

Some items require specific records, in addition to the basic records of income and expenses.

  • Alimony If you pay or receive alimony, keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree. If you pay alimony, you need to know your former spouse’s Social Security number.
  • Business use of your home Keep records that show which part of your home is used for business and the expenses related to that use. Child care providers should also keep track of hours open for business, as well as hours spent in preparation and clean up.
  • Gambling Keep an accurate diary of winnings and losses. Required information includes:
    • Date and type of gambling activity.
    • Gambling establishment name and address, and names of persons present with you.
    • Amount you won or lost.
  • Tax Credits Each tax credit includes special record requirements. Examples include:
    • Provider’s name, address, and taxpayer ID number for the Child Tax Credit.
    • Physician’s certification for the Credit the Elderly or the Disabled.
    • School records for the education credits.
  • Vehicle records If you use your own car business, medical transportation, or qualifying volunteer work, keep a mileage log that includes the date, destination, and purpose of each trip. You also need to know how many miles you drove for other purposes, such as commuting and personal use. Your vehicle records should include purchase or lease papers and loan records. You may receive a larger deduction if you keep records of gas purchases, maintenance costs, etc., in addition to mileage.

What is Proof of Payment

The records you keep provide the documentation to support the deductions and expenses claimed on your tax return. You must always keep documentation of the reason for the payment. Other documents, such as statements and receipts, will help establish that the item is allowable on your tax return.

If You Pay With Then the Statement Must Show
Cash Amount, payee name, transaction date
Check Check number, amount, payee’s name, date the check was posted to your account
Debit or Credit Card Amount charged, payee’s name, transaction date
Electronic Funds Transfer Amount transferred, payee’s name, date, the transfer was posted to your account
Payroll Deduction Amount, payee code, transaction date
  • Account statements Account statements from your financial institution are acceptable as proof if they provide the information shown above.
  • Pay statements You may have deductible expenses withheld from your wages, such as union dues, medical insurance premiums, and charitable contributions. Keep year-end or pay statements to prove payment of these items.
  • Mortgage interest Form 1098, Mortgage Interest Statement, documents interest you paid. Be sure to verify that the amount is correct.

Please let us know if you have additional questions about any step in this process. Here at Valentine CPA, we’re here to help make taxes easy. Reach out to us today for any tax questions or concerns!

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