Every time you file your taxes it creates a file package at the IRS on that year’s taxes associated with you name and social security number. In practice, the same activity should be a common ritual for a taxpayer as well. Why? Defense of your tax data and what you file is entirely your burden as a taxpayer. If you can’t produce the supporting documentation of how you arrived at you tax filing figures, then the IRS can assume you made it up. This is the worst place to be during an audit.
Much of the paperwork collecting that is required for good tax filing recordkeeping actually occurs well before the annual April 15th income tax filing date. Collecting, organizing, and scanning/photocopying of all your receipts and forms can easily be done on an ongoing basis month to month. This saves the mad scramble in March to pull all the same paperwork together (which usually results in lost items).
From the IRS perspective, per their guidance publications, there is no special format or filing approach for keeping you records. The critical issue is being able to produce the supporting document or receipt when the IRS asks for it. Supporting documentation that the IRS looks for falls into a few specific categories:
• – Bills, invoices or receipts used for tax deductions or credits
• – Mileage logs or documentation tracking vehicle usage
• – Canceled checks showing payments made to eligible deduction expenses
• – Personal or employment status documents proving your inclusion in a deductible status
• – Real property and investment records to support reported capital gains transactions and totals
• – Retirement account records to prove reported pre-tax and post-tax retirement financial transactions reported
Businesses have specific requirements for some records associated with their tax filings. For example, employee records must be retained for review for a minimum of four years after tax filing. Additionally, proof of revenue receipts, bank records, invoices, accounting books, and any miscellaneous revenue documentation must be kept on file for the same time period. On the expense side, if an expense is written against gross profits, it needs to be documented for proof it is a valid deduction.
More detailed requirements and related discussion on business record-keeping can be found in IRS Publications 552 – Recordkeeping for Individuals, Publication 583 – Starting a Business and Keeping Records, and Publication 463 – Travel, Entertainment, Gift, and Car Expenses. The guides can be downloaded on the Internet by going to the IRS government website at www.IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676) an requesting a copy.