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Recordkeeping
Imagine you’ve been selected by the IRS for an audit. Do you have the proper documentation to support your income and deductions? What does the IRS look for to validate your claimed income, deductions or tax credits? A little work now can mean little to no headaches later should you need to defend your return.
Generally, you need to consider three things when defining the record keeping requirements for the Internal Revenue Service.
- What to Keep
- How Long To Keep Records
- What Is Required As Proof
What To Keep
The requirements of what to keep vary depending on the area under review by the IRS. To assist you in keeping good records, a basic retention checklist is presented for your use. Key record keeping requirements for specific areas on the return are reviewed in “What Is Required As Proof”.
What To Keep Checklist
- 1040 Tax Return
- W-2s
- Work Papers
- 1099s
- 1098s
- Record of purchase and sale
- Divorce Deree and related records
- Account Statements
All IRS supporting schedules
- Canceled Checks
- Bank Statements
- Invoices
- Cash/Other Receipts
- Investment Records
- Record Log for Tips, Travel, Mileage
- Donation acknowledgments
- Other notes; proof of transaction
How Long To Keep Records
Per the IRS, “You must keep your records as long as they are important for any federal tax law.” Usually this means:
3 Years from the date your return is filed
OR
2 Years from the date the tax is paid
OR
6 Years after the return is filed if income is under reported by more than 25%
OR
Indefinite, if you failed to file a return or the return is false or fraudulent
The default date is the later of any of the above.
- If you file your return early (prior to April 15th) the IRS still uses April 15th as the filing date
- If in doubt, keep all your 1040s and supporting schedules indefinitely
Exceptions
Make sure you keep your return longer for two key reasons:
- Valuation of Property. You will need to keep returns AND supporting proof of expenses to determine the value of property you own and then later sell. They key item is your home. Make sure all purchase and selling documents are retained. Keep track of all expenditures that add to the value of your home as they will be used to help reduce any potential capital gains when you sell the property.
- IRA and Retirement Plan Information. Keep all records relating to IRAs and any pre-tax contributions to retirement plans such as 401-Ks. This is especially important if you contributed some funds to your plan in after-tax dollars. When you take the funds out at a later date you will need to prove that you have already paid taxes on the funds. Keep these records until all the funds have been distributed.
What Is Required As Proof
You’ve kept your records for the right time frame, but the IRS says you must prove your claimed deductions. The trick here is that “PROOF” has a sliding definition depending upon what is being reviewed.
Generally, proof of payments is a canceled check or cash receipt. If neither is available an account statement is often acceptable. To be adequate proof the following must be clearly shown:
- Amount
- Date of Payment
- Who the payment was made to (payee)
- Purpose of Payment
Adoption:
Bills, canceled checks, legal agreements, receipts
Child Care:
Bills, canceled checks, statement from child care provider
Medical & Dental
Bills, canceled checks, statements, receipts, mileage log
Mileage Log:
Date, miles driven, to/from destinations, purpose, PLUS expenses for tolls, parking fees, taxi and bus fares
Interest:
Statements, notes, canceled checks, Form 1098 (mortgage) or Form 1099 (interest and dividends)
Taxes:
Form W-2, canceled checks, statements
Miscellaneous:
Receipts, canceled checks, statements
Amount
Required Proof
less than $250
Canceled Check and Receipt from Charity
more than $250
Same as above PLUS charity acknowledgement or payroll records
Amount
Required Proof
less than $250
Canceled Check and Receipt from Charity
$250-$500
Same as above PLUS charity acknowledgement
$500-5000
All of the Above PLUS additional records PLUS file Form 3283
$5001+
All of the above PLUS substantiation
Common Questions & Answers
Q. When is a credit card transaction deemed tax deductible? When the transaction is made or when you pay the credit card bill? What proof is required?
Credit card transactions are tax deductible when the transaction is made. Example: You make a contribution to the Boy Scouts using a credit card on December 31st. You pay the credit card bill on January 15th. The contribution can be deducted in the year the transaction was conducted, not when the credit card bill was paid. Your credit card statement is then used as proof of the transaction along with any receipts.
Q. My bank does not return canceled checks, can the duplicate copy be used?
Yes, but only in conjunction with the bank statement showing the checks clearing. You may also use a copy of a paid invoice or statement. In a pinch, often you can get copies of canceled checks from your bank for a fee.