Preparing tax forms is a job few individuals or business owners enjoy. Yet, once a year, like clockwork, we have to do it. Some people put it off so long that they find themselves applying for extensions every April. That may be as much a problem of lack of preparation as it is procrastination — and it can be avoided.
All taxpayers have to do is prepare adequately for the inevitable form filing by keeping careful records all year, and their tax tasks will be less onerous. The filing process will flow along more smoothly, and careful preparation may help taxpayers avoid penalties and audits.
Smart Business spoke with Steve Gross, a principal with Skoda Minotti, to get a few tips on what tax records to keep, in what form they should be kept, how long they should be retained and how taxpayers will benefit from staying ahead of the game.
How do taxpayers benefit from keeping and organizing records for tax purposes?
Careful record keeping simplifies the tax return preparation process. The more organized a taxpayer is, the less time it takes to prepare the returns, and the less costly it becomes for people who work with tax preparers. Remember, the longer it takes to prepare a return, the more money it is going to cost to have it prepared. That applies to individuals and business owners alike because, as the adage goes, ‘Time is money.’
What types of records should taxpayers retain from year to year?
One key document is last year’s return and the information it contains. This is helpful for individuals and tax preparation professionals who can use them as a guide for this year’s forms. On the income side, you should keep 1099s that show dividend and interest earned as well as brokerage statements. W-2 forms provided by your employers not only reflect income but also federal, state and local taxes withheld. If you invest in partnerships or S corporations, you should retain the K-1s reflecting your share of income and deductions. On the deduction side, you should keep 1098 forms that reflect interest paid to banks as well as real estate taxes. You should also keep outof-pocket medical receipts, college tuition receipts and employee unreimbursed business expenses.
Should taxpayers keep records of donations to charitable organizations?
This is a hot topic. For calendar years beginning in 2007, no deduction is allowed for contributions of cash, checks or other monetary gifts, regardless of the amount, unless the donor maintains either (1) a bank record, such as cancelled checks or (2) a receipt, letter or other written communication form the donee. Contributions of $250 or more must be substantiated by written acknowledgement from the charitable organization. There are other special rules for non-cash contributions, such as clothing and furniture, in excess of $500, and more stringent rules relating to the donation of used vehicles to charity. You may want to seek the advice of a tax professional in these cases.
Is the manner in which tax records are kept and stored important?
Most importantly, organize the data and store your tax records in a safe place. In the event you receive the dreaded letter from the IRS that you have been selected for audit, not only will you save time but any anxiety that you may have will be reduced knowing you have the records they request. For the current year’s taxes, I suggest a file folder or large envelope to keep receipts received during the year. This makes it easy to gather the date needed in order to prepare the tax return.
What consequences might befall taxpayers who don’t keep accurate tax records?
Tax authorities may disallow deductions during an audit if the proper documentation is not available to them. This would include such items as rental property expenses and unreimbursed employee business expenses. This will cause additional taxes due as well as penalties and interest. This also may cause an agent to decide to audit a previous or subsequent year. Another reason for keeping accurate tax records is that this ensures all income has been reported and that no deductions have been omitted.
For how long should taxpayers keep records?
I tell clients to keep their tax records for a minimum of four years and a maximum of six years. Generally a tax return is open for audit by the Internal Revenue Service for three years from the original due date of the return or the date it was actually filed, whichever is later. An exception to the general rule stated above is if a taxpayer omitted 20 percent or more of his or her income. Then the tax return would be open for audit for a period of six years.
STEVE GROSS is a principal with Skoda Minotti, which is based in Mayfield Village, Ohio. Reach him at (440) 449-6800 or email@example.com.