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Are you files busting at the seams? Here are answers to the "why, what and how long" of tax record keeping.
We asked Sonia Narvaez of CPA Accounting & Tax Services Why we should keep old tax records.
Sonia advised that "there are many reasons to keep records. In addition to tax purposes, you may need to keep records for insurance purposes or for getting a loan". Good records will also help you to:
· Identify sources of income. You may receive money or property from a variety of sources. Your records can identify the sources of your income. You need this information to separate business from non-business income and taxable from non-taxable income.
· Keep track of expenses. You may forget an expense unless you record it when it occurs. You can use your records to identify expenses for which you can claim a deduction. This will help you determine if you can itemize deductions on your tax return.
· Keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made.
· Prepare tax returns. You need records to prepare your tax return. Good records help you to file quickly and accurately.
· Support items reported on tax returns. You must keep records in case the IRS has a question about an item on your return. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.
These are the records you should keep:
First of course you need to keep your the tax returns. This would include 1040 and state returns but also corporate, sales tax, payroll and any other returns you file.
Here are the most common items you need to keep to verify income on your tax return.
· Form(s) W-2
· Form(s) 1099
· Bank statements
· Brokerage statements
· Form(s) K-1
Electronic records. All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law.
An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. The electronic storage system must index, store, preserve, retrieve, and reproduce the electronically stored books and records in a legible, readable format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. You must also be sure that any electronic documents are properly backed up.
Sonia says that her firm is always available for guidance.
For more information this is an excellent IRS publication.
Record Keeping for Individuals