Friday, April 25, 2014
BP Holdings on Best Tax Record-keeping Tips
Nothing lasts forever, but you wouldn't believe it by looking at some people record-keeping systems. Prolific pack rats insist on keeping every scrap of paper, just in case. And when it comes to tax paperwork, folks are even more adamant. These documents will save me, they argue, if an Internal Revenue Service auditor comes visiting. But that’s not necessarily the case, say tax and organizational experts.
There are limits
When it comes to tax-related documents, you should hang on to records that help you identify sources of income, keep track of expenses, determine the value of property, prepare tax returns or support claims made on those returns. However, common sense--as well as storage space--should be your guide. "We get people looking at boxes of stuff in their basements and ask, ' Can I toss it? '" says Linda Durand, a CPA and senior tax manager with Drolet & Associates PLLC in Washington, D.C. "A lot of it, they can."
The rule of thumb for tax papers is hold onto them until the chance of audit passes. Usually, this is three years after filing. But if the IRS suspects you underreported your income by 25 percent or more, it gets six years to check into your tax life.
That’s why most accountants advise taxpayers, even those who are meticulous fillers, to keep tax documents for six to 10 years.
Use it or lose it
This means 1040 forms and any accompanying tax schedules, along with the documents supporting the return, such as W-2s, 1099 miscellaneous income statements and receipts or cancelled checks verifying tax-deductible expenses.
"Anything that you need to do your taxes, hang onto it," says Saul Rudo, a tax attorney and partner in the Chicago office of Katten Muchin Rosenman LLP. But don't go overboard. If you used something to claim a deduction, keep it. If not, shred it. For example, says Rudo, all those medical bills are useless--and just taking up space--if you didn't accumulate enough to meet the deduction threshold.