Sacramento CPA, Tax, Accounting, Bookkeeping
Recordkeeping
Why should you keep good tax records?
• Records identify sources of income. This information is helpful to identify nonbusiness income and taxable from nontaxable income.
• Records keep track of expenses. Good records help identify expenses that you can claim as a tax deduction. This will help you determine if you can itemize your deductions on your tax return.
• Keep track of the basis in your property. This includes the original cost and any improvements made to the property.
• Prepare your tax return. Good records will help you gather the necessary tax information to accurately prepare your tax return.
• Support items reported on your tax return. You must have good tax records to show the IRS if your tax return is selected for examination. If you cannot produce the tax records, you may have to pay additional tax and penalties.
What kinds of tax records should you keep?
The IRS doesn’t require you to keep records in a certain way. Keep them organized in case the IRS examines your tax return. You should keep your tax records in a safe place organized by year and type of income or expense.
• Computerized tax records. You can use software to track your income and expenses. These programs require little knowledge of bookkeeping and accounting. In addition to these records, you need to keep proof of payment, receipts, and other tax documents to substantiate the amounts reported on your tax return.
• Copies of tax returns. This will help you prepare future tax returns and you will need them if you file an amended tax return.
• Basic income tax records that should be kept are Forms W-2 and 1099, bank statements, brokerage statements and Forms K-1. You should keep your W-2 until you begin receiving social security tax benefits. This will help you prove your case if there are any questions about your work record.
• Basic expense records that should be kept are sales slips, invoices, receipts, canceled checks, and written communications from qualified charities. Your tax deductions may include alimony, charitable contributions, mortgage interest, real estate taxes, and child care expenses.
• Home records should include closing statements, purchase and sales invoices, proof of payment, insurance records, and receipts for improvements.
• Investment records should include brokerage statements, mutual fund statements, Forms 1099 and 2439. Investments include stocks, bonds, and mutual funds. Your records show purchase price, sales price, and commissions.
How long should you keep records?
You must keep your tax records that support items reported on your tax return until the period of limitations runs out for that tax return. The period of limitations is the time in which you can amend your tax return to claim a credit or refund or the IRS can assess additional tax.
• If you owe additional tax, the period is 3 years from the date the tax return was filed or 4 years for California.
• If you don’t report income that is greater than 25% of the gross income reported on your tax return, the period is 6 years from the date the tax return was filed. • If you file a fraudulent tax return, there’s no limit. • If you don’t file a tax return, there’s no limit. • If you file a claim for refund after you filed your tax return, the period is the later of 3 years or 2 years after the tax was paid. • If you file a claim for a loss from worthless securities, the period is 7 years.