I really don’t mean to sound like your mother, but it’s really very important to keep good records. If you’re keeping all of your financials on your desk computer… your ipad…your cell phone (yes, some folks do that) or your laptop, make sure whatever you have is backed up. As my Dad used to say, always have a ‘plan B’. Crashed hard drives, stolen computers, cell phones that suddenly quit and become junk, all of that can and has happened. Don’t be a ‘victim’ and run the risk of losing valuable and unrecoverable financial information. Invest in a hard drive backup or a couple of flash drives and keep it in a safe place. I know it’s rather ‘old school’ but it’s not a bad plan to keep hard copies of important transactions. Remember, if you are ever audited or your tax return questioned, the IRS wants original documents and proof that what you are claiming is true and accurate. They are extremely particular about this. I can’t tell you how many times I’ve sat across from a client while doing their taxes and ask “Where’s your documentation?”
I’ve had some clients who were not real adept at keeping hard copy original receipts actually resort to getting a couple of shoe boxes (don’t laugh – this has happened) and marking in black magic marker ‘Receipts’ and just chucking them in the ‘shoe box’ on a regular basis. But if that works… who’s to argue! Seriously though, the IRS says that the length of time you should deep a document depends on the action, the expense, or the event that the document records. Generally you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out. The period of ‘limitations’ is the period of time in which you can amend your tax return to claim a credit or refund, or that period of time that the IRS can assess additional tax. You can go to the IRS’s web site and click on the link for ‘Small Businesses and Self Employed’ and it will list the 7 different situations that impact how long you should keep records.
One word of caution. When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. As an example, your insurance company or maybe some creditors may require you to keep them longer than the IRS does. In the case of a piece of property, where you receive property in a nontaxable ‘exchange’ … you must keep the records on the old piece of property as well as the record for the new property until the period of limitations expires for the year in which you dispose of the new piece of property in a ‘taxable disposition’. If you are in doubt give me a call or send me an email and I’ll answer your question.
Posted by Kevin Beatty CPA, Rochester Tax Service