As the countdown to April 15 continues, it’s likely that you’re knee-deep in receipts, canceled checks, brokerage statements and other financial records that your tax advisor will need to prepare your individual income tax return. Having organized records — and knowing when to keep or discard them — can ease the pain of tax season.
Managing Your Tax Records
Maintaining accurate and up-to-date financial records is critical to determining your tax liability. Carefully review your records at least once a year and discard what’s no longer necessary or relevant. Here are some guidelines for managing specific records:
Tax-related documents. Keep tax-related documents, such as receipts that support your deductions, for at least three years after you file your original return. Why? Because the IRS typically has three years from the date you file — including extensions — to audit you. (If you omit more than 25% of the amount of your gross income stated in your tax return, the statute of limitations can extend to six years.)
There’s no time limit if you fail to file a return (or file a fraudulent return). So permanently keep a copy of tax returns for a longer period of time (10 years or more) as evidence that you filed.
Save W-2 forms until you start receiving Social Security benefits to serve as a record of your work history and earnings. Your annual statement from Social Security will show your earnings history per their records.
Property records. Hold on to closing documents from a property sale or purchase, as well as receipts from home improvements or from money you invested in the property, for at least six years. If you’ve owned your home or other real estate for longer than that time, keep your tax return and records relating to any improvements dating from when you purchased the property so you can document your adjusted basis in it.
Investment account statements. Keep investment statements until you receive your year-end statement and confirm that it reflects your transactions for the year. Save trade confirmations that show the purchase and sale of mutual funds and stocks for three years after you report the capital gain or loss on your tax return.
Checking account and credit card statements. If your checking and credit card statements include deductible expenses, retain them for a minimum of three years after you file.
Utility bills. Keep these documents for a minimum of three years if you need them to support a home office or rental property deduction.
Pay stubs. Retain these until you’ve reconciled the totals with your Form W-2.
Organizing and Storing Records Safely
The IRS requires you to maintain the fundamental accounting records needed to file and support an acceptable tax return, including documents that reconcile differences between your accounting records and your return, to avoid penalties. This would apply to your individual tax return if you have a sole proprietorship or a single member LLC reported on Schedule C.
Are you able to easily locate all of your important financial records? Create a record keeping system that organizes important documents so that you can readily access them.
Maintain copies of these records at home, and keep the originals in a safe deposit box or other secure place in another location. You also may store records electronically so long as your computer storage system meets IRS security and retrieval standards.
Getting a Jump on Next Tax Season
April 15 may be only weeks away, but it’s never too late to begin organizing your financial records. Doing so will help you stand up to IRS scrutiny, ward off costly penalties and alleviate some tax-related stress.
At Cleary, we are committed to a holistic approach of protecting and preserving our clients’ financial assets. Give us a call today at 617-723-0700 and let us know how we can help you.