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Tax record keeping rules and tips

Jeb Bush really did have 33 years of tax returns on hand and he opened them up for public inspection yesterday.

When the former Florida governor announced that as part of his campaign to be the 2016 Republican presidential nominee that he was going to go to the extreme on personal tax transparency, I immediately wondered why he selected that particular number of years. 

I also wondered how come he had that many years of tax records on hand.

I was not alone. CPA and Twitter pal Deanna Richardson also was intrigued by the massive amount of tax records.

Deanna Richardson Twitter comment on JBush tax returns

Most of us are like Deanna clients. So for those of us not seeking the White House, here are some tax record keeping rules and tips.

Why should I keep tax records?
On the individual tax side, documentation will help ensure that you don't miss any tax breaks. More importantly, thorough records will prove to the IRS that your tax deduction and credit claims are legitimate.


Remember, when it comes to tax questions from an IRS examiner, the burden of proof is on you, the taxpayer.

Uncle Sam goes into the process assuming you're trying to put one past him, so you have to show that you are on the tax up-and-up. If you can't, the auditor can disallow the tax breaks in question. But if you have good records, that will speed up the IRS examination process, something both the IRS and taxpayers want. 

Comprehensive record keeping also is critical to business taxpayers. Not only will good company records help you track deductible expenses and complete your tax returns, the documentation also can help you identify sources of income, prepare financial statements, track basis in property, prepare your tax returns, and generally monitor the progress of your business.

And diligent record keeping applies not just to big businesses, but also smaller companies and sole proprietors.

What record keeping system should I use?
For personal tax filing purposes, the IRS doesn't care what type of record keeping system you use as long as it fits your needs and clearly shows your income and expenses. The same generally is true for corporate filers, too, although the type of business you have affects the type of records -- for example, payroll, inventory, depreciated equipment -- you need to keep for federal tax purposes.

What kinds of records should I keep?
OK, so it's up to me to decide how to keep my records. Surely the IRS has some ideas on the types of records I should keep. You're right. Here are some considerations.

If you receive money from several sources, such as salary from a main job or freelance income as an independent contractor or from side jobs, you'll need the documents showing those earnings. You records should clearly identify the pay sources and amounts.

And don't forget your investment income. Those records are critical not only for keeping track of how they're doing, but what taxes you might owe. If you receive dividends, that's taxable, even if the payments are reinvested in the asset that is creating the payments. And if you sell, you need the records to figure the proper taxable basis.

In work and investment related income, you should receive some sort of third-party documentation, such as a W-2 or 1099 form. The IRS gets these copies, too.

Other payments, however, that don't trigger such documentation mean the burden of substantiating the income falls on you, even without an official tax statement.

Ditto for expenses. Here you need hang onto all tax-related expenses, such as business expenses, educational costs, charitable and disaster losses.

A good cheat-sheet of the type of records to hold onto is your annual filing checklist. Basically, all the things you need to fill out your Form 1040 and associated schedules are the same documents should keep, at least for a while, after April 15.

How long should I keep records?
OK, you know which basic records to keep. Now the big question: How long? As with most tax answers, it depends.

The IRS says that the length of time you should keep a document depends on the action, expense, or event that the document records. The agency's rule of thumb is that you should keep your records as long as needed to prove the income or deductions on a tax return.

And "as long as needed" generally is until the period of limitations on auditing that return expires.

So what are those audit statutes of limitations? They range from two years to forever. Here are the specifics on those wide-ranging time periods:

  1. Keep records for three years if situations 4., 5. and 6. below do not apply to you.
  2. Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for six years if you do not report income that you should report, and it is more than 25 percent of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.

A timing note for early filers: If you send in your tax return before April 15, it's treated as filed on the due date.

So basically, as the numbered list above shows, three years is the general time frame for most taxpayers.

But if you blow off your tax filing responsibilities or file a blatantly wrong 1040, the IRS can come after you any time. When that happens -- and yes, I say "when," because even tough audit rates have been dropping in the past few years, I'm a worrier and like to be ready for the worst-case scenario -- you'll need any records you can dig up to deal with the situation.

The IRS also has one more time frame for businesses to note. If your company has employees, keep those worker tax records for at least four years after the date that the tax (generally payroll tax payments) is due or is paid, whichever is later.

Finally, while you generally can throw out substantiating tax documents after the audit statute of limitations expires, when it comes to the 1040 and related schedules, you should keep those documents forever.

Yeah, I know, I picked on Jeb for his 33 year tax return collection. That's what I get for trying to be a comic. 

But tax forms themselves are always good to have handy. They are useful in preparing future tax returns or, if you discover you made a mistake, in filing an amended return.

You also might find these items of interest:


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Thanks, Thias. That fraud pronouncement always cracks me up, too. As for guidance, check out this post http://www.dontmesswithtaxes.com/2012/03/take-your-tax-receipts-green.html -- it has links to two IRS Rev. Procs.-- 97-22 and 98-25 -- that detail automated record keeping rules. Kay

Thias @It Pays Dividends

Great explanation of how long to keep things. My favorite, of course, is if you are committing fraud on your return, be sure to keep all the information backing it up :)

Just curious, do you know if there is guidance related to keeping the original hard copies or scanning everything in and keeping it electronically?

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