Now is the time to get jump start on 2010 tax return
Published 12:36 am Sunday, April 25, 2010
Now that April 15 has come and gone, it’s a good time to review record keeping essentials. Why do I need to keep records? What records do I keep and in what form? How long should I keep the necessary documents?
Record keeping is important not only for tax purposes, but also for insurance purposes, loan applications, estate planning, etc. These records help to identify sources of income. Is the income taxable or nontaxable? Records are a good source for helping you to determine the deductibility of an expense item. Also, for those of us who tend to be forgetful, the document can jog your memory to include the item in your tax return.
Good record keeping facilitates accurate and timely tax return filing. If the IRS should question an income or expense item on your tax return, the record will support the item in question. Not providing the required documentation could subject you to additional taxes, penalties, and interest.
The IRS has no particular format or way in which you should keep records. They only require that you keep the records in a manner that will enable you and the IRS to correctly determine your taxable income and tax due. Records can be kept in hard copy format or in electronic format, as long as it is legible and readable. The documents must be complete and accurate as well as be accessible to the IRS should they question an item on your tax return.
Both formats are subject to the same retention guidelines. The IRS provides guidance on electronic storage in Rev. Proc. 97-22.
As to specific records you should keep, tax returns are a must. Other records to keep involve support for income and expense items you report to the IRS. Basic income support documentation includes Form(s) W-2, Form(s) 1099, brokerage statements, and Form(s) K-1. Receipts, invoices, canceled checks, and acknowledgements provide good documentation for expense items.
Closing statements on purchase/sale of your home should be kept to determine basis in the property. Records showing purchase price of stocks, bonds, and other investments should be kept until disposition of the asset. Bank statements are another good source of income and expense records. Store records in a safe and orderly fashion by year.
The time frame on how long to keep these records depends on the various statute of limitations, with some exceptions. It is a matter of good judgment and knowledge of these state and federal statute of limitations.
Also consider nontax purposes for keeping your records. Check your insurance policy requirements and loan agreements for any documents to keep on hand. For tax purposes, documentation supporting an item of income or a tax deduction reported on your tax return should be kept until the statute of limitations expires for that tax return. Usually, the statute of limitations is three years after the return was filed (or due date if the return was filed early), or two years from the date the tax was paid to the IRS, whichever is later. If unreported income of more than 25% is found by the IRS, the statute of limitations is extended to six years. If a fraudulent return is filed, there is no statute of limitations. This also applies if no return is filed. Here are some recommended retention periods for various records. As stated earlier, tax returns should be keep indefinitely.
Receipts, canceled checks, paid invoices, bank deposit slips, and bank statements should be kept for seven years either in hard copy format or in electronic format. Ownership and investment records should be kept for the ownership period plus seven years.
Using good judgment and organized methods help you keep accurate and complete records for tax return preparation. It can save you time and money with proper record keeping.
Denise H. Seale is a CPA at Silas Simons, LLP. She can be reached at 601-442-7411.