A Tax Fact from The Tax Institute at H&R Block

Tax season is now just a fond (?) memory, but good record keeping all year long will save you time when preparing your taxes next year, and should the IRS have questions down the road, good record keeping will also help you explain how your return was prepared. Good recordkeeping means you don’t have to worry should your return ever be audited.

But before you start stockpiling every little slip of paper, learn what items to save and what to discard when prepping for the current tax season and beyond.

Records to hold on to:

• General financial documents: You should keep pay stubs, W-2 forms, records of tips earned, receipts for big dollar items such as the purchase or sale of an automobile or home, records of investments along with contributions to retirement accounts, bank and brokerage statements, and 1099 forms.
• Receipts for deductible items: When making payments toward a deductible item by credit card, electronic funds transfer or check, you'll need to record the check number, dollar amount, payee's name and date of the transaction. If you make a payment in cash you should get a signed and dated receipt showing the amount and reason for the payment.
• Insurance and medical records: Hold on to papers regarding insurance claims and medical expenses along with dates and specifics as to what was paid for and when.
• Theft or loss documentation: Theft loss should be documented, including value of the loss items, the date the property was first noticed missing and proof that it was yours. Also document any recovery efforts made, such as a police report you obtained.
• Gambling records: Gambling records should state the type of gambling activity, the amount won or lost, address or location of the establishment, names of others present with you and the date.
• Charitable records: To deduct any charitable donation of money, tax laws require a taxpayer to have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement and other documents furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. There are also substantiation requirements for donations of property, such as household items, stock, and cars.
• Self-employment records: If you are self-employed or use your home for business, you will need to keep a special set of records. Consult with a tax professional for additional information. Tip: Keep a separate bank account, separate credit card and separate phone for your business.
• Tax returns: Generally, you should keep copies of your filed tax returns for three years – the time period you have to amend your return or for the IRS to assess additional taxes, though H&R Block recommends at least seven years. You may need to refer to your tax returns for information on stock basis or other financial information you haven’t kept anywhere else.
  
  Keep in mind that if you underreport your income by 25%, file a fraudulent return, or don’t file a return at all, the IRS may look beyond 3 years for records and information.

Storage options
It's a good idea to keep your records in order by date, broken down by category. Organizing your receipts, pay stubs and various financial forms as the year goes along will make it easier to get the numbers you need when it's time to file your tax return each year. Several software programs on the market are designed to help you maintain records or you can use a free web-based personal financial management service like www.mint.com; however you should still hold on to original receipts and tax forms. It's a good idea to use a folder, envelope or binder to keep all of your records for the tax year together and then store these yearly files away in boxes or on shelves for later reference.

For prior years, you have several storage options, depending on your preference.

The most common, and probably safest, is the safe deposit box. You can rent a safe deposit box at most banks. A fireproof safe or a file cabinet is also a good choice. A fireproof safe provides protection against fires and theft, and a file cabinet provides the convenience you may need to stay organized.

It’s also a great idea to store information on your computer, but make sure you have adequate password, virus, and firewall protection. Backing up data on an off-site web server is highly recommended. If you store information on any type of media (such as a CD), consider making a copy for a trusted friend or family member who does not live with you. Finally, be especially careful about safeguarding personal information stored on “thumb” or “flash” drives — which can be easily lost or stolen.

Now, the last word
Remember, even though you may not need to hold on to these financial records for tax purposes, you may wish to maintain them for proof to creditors or for use in insurance claims. The IRS does recommend that you keep copies of your W-2 forms until you're eligible for retirement in case there's a discrepancy.

This Tax Fact is brought to you by The Tax Institute at H&R Block. 

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.