Tips for well-organized tax records

The IRS has issued a fact sheet that discusses basic record-keeping tips, including what records are needed to prepare a return and how to keep them.

One of the more interesting recommendations is for taxpayers to keep a duplicate set of records in a separate location in case of emergency.

Essential records – such as receipts, canceled checks and other documents that support an item of income, deduction or credit appearing on a return – must be kept as long as they are relevant under federal tax law. The recommended period is generally three years from the due date of the return.

All of the requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records.

Here are some specific basic recommendations:

  1. Copies of tax returns– You should always keep a copy of every tax return filed. You can use these copies to help prepare future returns, and they could come in handy if you need to file an amended return or are audited. Past returns can also be helpful to the survivor or executor of a taxpayer’s estate.
  2. Income records– These records substantiate the amounts reported as income on the tax return and may include wages, dividends, interest and partnership or S Corporation distributions. Form W-2, Copy C, should be kept until you begin receiving Social Security benefits in case there is a question about earnings in a particular year. Forms 1099, K-1 schedules and various other important tax documents should be kept, along with a copy of the return for that particular year.
  3. Expenses– Receipts, statements and other basic records back up deductions for alimony, charitable contributions, mortgage interest deductions and real estate taxes. This documentation is especially important if you are a sole proprietor and file a Schedule C.
  4. Home– You should keep a copy of the closing statement on your home, as well as documentation relating to capital improvements made. While the gain on the sale of your principal residence is generally nontaxable, sometimes the IRS wants you to substantiate certain numbers.

Good basic record keeping makes it easier to prepare and amend your tax returns. Records also make it much easier if you should ever be under IRS audit. Documentation that backs up every number on the return should be kept along with a copy of the return itself.