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Six Steps for Putting Tax Records in Order

Hardly anyone we know enjoys keeping all the records that are required by the federal tax law. Unfortunately, it is a necessary evil.

Because you will probably be stuck with some recordkeeping responsibilities, you may as well make the best of a bad situation. For instance, you can set up a comprehensive personal recordkeeping system to keep track of income, expenses, receipts, etc. Here are six suggestions:

1. Keep an up-to-date diary or online ledger. This usually is the easiest way to record those expenses that may be claimed as itemized deductions on your tax return. The list includes medical and dental expenses, interest expenses, charitable contributions, miscellaneous expenses, etc. You may want to maintain a separate diary for a detailed category of expenses. For example, it is common to use a contemporaneous diary to record business automobile or travel and entertainment (T&E) expenses.

2. File expense and income items in separate folders. You should be able to keep infrequent items together in one folder. However, T&E expenses should be handled separately due to the extensive substantiation requirements. In general, you must document the date, amount of the expense, the business purpose and other details (depending on the nature of the expenditure). Receipts are needed for items of $75 or more.

3. Review your expenses on a regular basis. It is much easier to utilize tax planning during the year if you know where you stand. For instance, you might total up the expenses recorded in your diary at the end of each quarter. If you wait until the year is over, it may be too late to take action.

4. Coordinate all your financial records. For instance, you can carry through a color code system to checkbooks and credit card receipts by circling the check number or transaction in the appropriate color. Another possibility: Use the memo lines or other space provided on checks or charge slips to note the details of the transaction. This system can be a backup in case your diaries are lost.

5. Store your records in a safe place. Even the best recordkeeping system will not do you any good if you cannot retrieve the records. Consider storing valuable documents in a fire-resistant strongbox or some other locker. You might keep check registers, credit card statements and the like in a safe-deposit box.

6. Adjust your system as needed. No matter what kind of recordkeeping system you adopt, try to remain flexible. A change in circumstances-for example, the purchase of a home-may require changes in your setup. Remember: The system is for your benefit, not your burden.

In general, the statute of limitations on IRS adjustments is three years. But the limit is six years for any return that omits 25% or more of an individual's income. And there is no time limit whatsoever if fraud is involved. To be on the safe side, it is often recommended that you hold onto your records for at least ten years.

Advisory: A professional preparer can help you get your records in order. In turn, better organization may pave the way for tax savings on your return.

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	[ return to list ] Six Steps for Putting Tax Records in Order Hardly anyone we know enjoys keeping all the records that are required by the federal tax law. Unfortunately, it is a necessary evil. Because you will probably be stuck with some recordkeeping responsibilities, you may as well make the best of a bad situation. For instance, you can set up a comprehensive personal recordkeeping system to keep track of income, expenses, receipts, etc. Here are six suggestions: 1. Keep an up-to-date diary or online ledger. This usually is the easiest way to record those expenses that may be claimed as itemized deductions on your tax return. The list includes medical and dental expenses, interest expenses, charitable contributions, miscellaneous expenses, etc. You may want to maintain a separate diary for a detailed category of expenses. For example, it is common to use a contemporaneous diary to record business automobile or travel and entertainment (T&E) expenses. 2. File expense and income items in separate folders. You should be able to keep infrequent items together in one folder. However, T&E expenses should be handled separately due to the extensive substantiation requirements. In general, you must document the date, amount of the expense, the business purpose and other details (depending on the nature of the expenditure). Receipts are needed for items of $75 or more. 3. Review your expenses on a regular basis. It is much easier to utilize tax planning during the year if you know where you stand. For instance, you might total up the expenses recorded in your diary at the end of each quarter. If you wait until the year is over, it may be too late to take action. 4. Coordinate all your financial records. For instance, you can carry through a color code system to checkbooks and credit card receipts by circling the check number or transaction in the appropriate color. Another possibility: Use the memo lines or other space provided on checks or charge slips to note the details of the transaction. This system can be a backup in case your diaries are lost. 5. Store your records in a safe place. Even the best recordkeeping system will not do you any good if you cannot retrieve the records. Consider storing valuable documents in a fire-resistant strongbox or some other locker. You might keep check registers, credit card statements and the like in a safe-deposit box. 6. Adjust your system as needed. No matter what kind of recordkeeping system you adopt, try to remain flexible. A change in circumstances-for example, the purchase of a home-may require changes in your setup. Remember: The system is for your benefit, not your burden. In general, the statute of limitations on IRS adjustments is three years. But the limit is six years for any return that omits 25% or more of an individual's income. And there is no time limit whatsoever if fraud is involved. To be on the safe side, it is often recommended that you hold onto your records for at least ten years. Advisory: A professional preparer can help you get your records in order. In turn, better organization may pave the way for tax savings on your return. [ return to list ]
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