Recordkeeping for Individuals -
General Requirements
Gathering all of the pertinent information
and records that are needed to prepare a tax return can be quite annoying and
boring. However, it is essential that you compile the right information so that
your return can be prepared properly. Maintaining records also is critical so
that if the IRS later audits the return, you will be able to withstand the
challenge. Sometimes, you even need to retain records to fend off potential
challenges on returns for years subsequent to the year of the return to which
the records directly relate. In addition, records are a first line of defense
against many penalties.
What are the basics? While your records must
be accurate, the Internal Revenue Service generally does not require any
particular form of recordkeeping. One of the best records of having paid a
particular expense is a cancelled check. Keep your cancelled checks that relate
to any items that you need or even only think will be needed to prepare a tax
return that you may have to file.
You also should retain receipts, sales
slips, and invoices referring to items that might be included on a return. Of
course, once your return has been prepared and items have, in fact, been
included in the return as deductions or in some form or another, it is
imperative that you keep records supporting the claimed tax treatment.
In addition to keeping records to support
deductions, you will also need to keep records to keep track of what income you
will need to report on your tax return. These include Forms W-2 showing wages
from employment and Forms 1099 showing compensation from any independent
contracting work you performed. Apart from Forms 1099, separate accounting
books and records are needed for independent contracting jobs. There are a
whole series of other Forms 1099 showing interest, dividends and other types of
income, which you should keep, along with financial statement from brokerage
houses. Of course, you should also keep copies of your tax returns. Also, keep
copies of related schedules and attachments with the returns.
Another question that arises with respect to
recordkeeping is how long you need to keep the records. The short answer is you
need to keep them for as long as the IRS can potentially challenge you on the
item to which a particular record relates. This period generally is 3 years
from the date you file your income tax return or, if later, 2 years form the
time you pay the tax. If you file your return before the due date, the IRS gets
to measure the 3 year period from the actual due date. Sometimes, the so-called
limitation period is 6 years. There is no limit for the IRS to bring an action
against someone who has filed a fraudulent return.
In some cases, you should keep records
longer than the regular limitations period. For example, you should permanently
keep records of your basis in property. Basis is the yardstick for measuring
tax gain or loss and usually is the amount you paid for property and major
improvement to it. Note: Although many homeowners may no longer need to keep
track of basis for selling their principal residences due to the 1997 Taxpayer
Relief Act's exclusion of $250,000 of gain for the sale of a principal
residence ($500,000 exclusion for married taxpayers), most homeowners of
higher-priced homes should keep records since the chance remains that inflation
may push them above the $250,000 threshold at some future date.
You also should permanently retain certain
documents. For example, keep trust documents, wills, partnership agreements,
business contracts, divorce decrees, leases and the like.
If you have any questions about the
recordkeeping matters touched upon here or have specific recordkeeping
questions, please give us a call.
