year, five or ten years ago. Without a copy of that tax return, it’s nearly impossible to prove that you did file. They don’t take up much space. You can even scan them (preferably as PDF files), as long as you are certain that the copies are clean, readable, and retrievable a decade from now. Do you need all the backup records that went with the tax return? Not necessarily. But keep those for at least six to seven years.
Tip #7:
The IRS is generally only permitted to audit for up to three years after you file a tax return. However, if you have underreported gross income, overreported expenses, or have overstated the basis of assets by 25 percent or more, the IRS has the right to audit for up to six years. If there are criminal omissions or overstatements, the IRS may audit forever. But that should not apply to you. Add one to two years for state deadlines.
What about other records?
Tip #8:
Keep the following records until at least six years after the contracts or terms expire or assets are sold:
• Copies of all contracts, warranties, original insurance contracts, and loans. You will need these to ensure that the terms are met in the event you need to file a claim or a dispute. The (annual) invoices aren’t enough. The original contracts contain the terms.
• Purchase documents for real estate, and all improvements to the real estate. These will help you when you sell the property—or if you want to convert it to a rental.
• Copies of the original property’s purchase and sale, and the tax return reporting of the rollover if you ever rolled over gains—in either tax-free exchanges or the sale of a home—before 1998. (If you don’t have the records, start digging.)
• Purchase information and all splits of all stocks or securities that you are still holding (or sold this year). If you reinvested dividends, don’t forget to add those reinvestments to the cost. If you don’t have all the details, but know approximately when you originally bought the stock, www.netbasis.com can reconstruct the entire history of your ownership and compute your basis for a small fee.
• Deductions for funding a regular Individual Retirement Account (IRA). Sometimes, though, you make after-tax contributions. Be sure to track those, since those funds won’t be taxable when you withdraw your money. Also, states may have a different allowable IRA deduction. So you might have a tax basis for the state. (More details in Chapter 11.)
Tip #9:
Keep tax preparation records for at least six years. That means all the cancelled checks, receipts, and records that were directly used in the preparation of your tax return. This should include copies of all your notes, work papers, and correspondence with your tax professional or tax software company. Keep them with a copy of the tax return, so if you’re ever audited, everything is right there, right at hand.
TaxMama’s Recordkeeping Law of the Universe:
You won’t need to look at most of your records for years. But as soon as you throw something out—you will need it desperately.
Tip #10:
The benefits of mobile applications:
• They let you scan documents, checks, and receipts on the spot and let you upload them to your application instantly instead of spending your entire evening tediously entering data into a traditional print or electronic system. Yawn.
• They generally integrate with other tools to help you organize the data—or to have someone else organize the data for you (like Shoeboxed.com).
• The information can be stored in the Cloud, so you don’t need to worry about losing the data, fires, messy desks, and so on.
• When the documents are linked to specific lines in your books and records, you are creating an “audit trail.” That means if the IRS or state wants to see the receipt for a particular deduction (or category of deductions), you can just click and give it to them or print out the all the data in the category.
• Some of them will use GPS to track your mileage for each driving incident, allowing you to categorize the trip as personal, business, medical, moving, or charitable mileage. Others will require manual entries for each trip.
Tip #11:
The drawbacks of mobile applications:
• A warning about free apps—read the contract information carefully. You will learn that you generally don’t own your data. They can shut down the app at any time. Think about this: If they aren’t getting paid, how can they afford to keep providing your free service? What are they selling to get the funds to keep their doors open? Are they selling your data to advertisers? Is there a paid upgrade? What about the security of your private information, especially when you link these free apps to your bank accounts and brokerage accounts? Do they have access to your financial usernames and passwords? Who owns and/or creates the apps? Do they have deep pockets to compensate you or help you in the event of identity theft?
• Security—Some of the data are often also stored on your mobile device. You don’t generally have it password protected when you use it all day. So the data are at risk. If your device is lost or stolen, you must scramble to change all the passwords on all your accounts immediately.
Tip #12:
These are some of the top applications available to you for recordkeeping and mileage (listed in alphabetical order, not by preference):
DeductR: http://deductr.com
Expensify: https://www.expensify.com
FreshBooks: http://www.freshbooks.com
MetroMile’s mileage app: https://www.metromile.com/technology
Tip #13:
These are some of the top personal recordkeeping systems that provide full bookkeeping (listed in alphabetical order, not by preference). Many apps are designed to integrate with these systems:
Mint: https://www.mint.com
Outright: http://outright.com
QuickBooks: http://www.quickbooks.com/App
Quicken: http://www.quicken.com/stay-connected-your-money
Shoeboxed: https://www.shoeboxed.com
Note: Of course you can use Excel if you know how.
