It is okay to establish a system for maintaining your tax records in a costly or difficult way. Simply put, it needs to be organized. However, it is something that should be done given that the IRS can audit your tax returns for up to three years (and even longer if they discover something after that time that necessitates an audit). Without the proper documentation, you risk missing out on deductions and tax credits that could help your tax status even if you are never audited. Seek help from a CPA in Nashville, TN.
What types of documents ought to be kept?
You will need records of your income and expenses (if you claim them). Here are some of the essential items you will require during tax season, whether you are an individual or joint filer:
- W-2 declarations
- 1099 forms
- Credit union and bank statements
- Statements for credit cards
- Statements for mutual funds and brokers
- Returned check
- Payment stubs
- expense remittances
- Home purchase/sale contracts and closing disclosures
- Evidence for itemized deductions, such as real estate taxes, charity contributions, and mortgage interest
There are additional records you must preserve whether you are self-employed or the owner of a small business, and the IRS provides a useful overview of such documents here.
Where should your tax documents be stored?
Some people would rather preserve hard copies of everything, arranged in folders with category labels and kept in file cabinets, fireproof safes, or portable accordion folders. When tax season comes around, people either meet with their tax preparer in person or deliver their paperwork to the company.
But a rising number of people want to store and manage their tax documents digitally (which now also includes hard-copy records that have been scanned or photographed). In this manner, they can easily collaborate remotely with their accountant and eliminate the need to organize and preserve physical data.
Important: If you utilize digital data, make sure that you:
- Have solid cybersecurity practices in place to safeguard your system.
- Keep an updated backup copy of those files somewhere safe, such as the cloud or on a portable drive.
Ensure the method you select is doable and simple for you to use. If it is too difficult, you will lose patience and revert to the disorganized state that initially prompted your search for an organizational method.
How long should tax records be kept?
Generally, you must maintain your tax documents for at least three years after submitting your initial return. However, as we have indicated, you might wish to keep your records around for a little while longer in case you were audited, especially if you run a small business or are self-employed.
