The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.
Perhaps two of the most stressful situations in life are 1) preparing a tax return, and 2) going through a tax return audit. You are solely responsible for your tax returns, even if someone else prepared it, and you must always be prepared to justify the amounts that you reported. CPAs and tax preparers have an important rule which we follow – “No receipts or documentation – no deduction!”
There are several strategies that  are available to you which can easily “level the playing field” and diminish the stress levels which you may have experienced every year in the past:
-  Keep all supporting receipts and documentation – these can be either in paper or electronic format. Group these records by tax return category, i.e. income, interest, dividends, education expenses, medical expenses, taxes, mortgage loan interest, charitable deductions, miscellaneous deductions, etc.
- Use software applications- Microsoft Excel and Intuit’s Quicken are both excellent. There are also others that are available which you may prefer.  Acrobat Reader, which is free, provides an application to save and store the files on your hard disk drive. Be sure that your files are continuously backed up.
- Maintain your own data base – if you have decided to engage one, your tax preparer should always provide you with a complete, detailed version of your tax returns, including supporting schedules, statements, and notes. Don’t rely on your tax preparer to maintain a data base for you. He or she will not always be available, or you may change tax preparers, move, etc.
- Ensure that your tax return files are always current, accurate, and complete – for example, you purchased a home in 1990. You should begin creating your data base starting with all of the  closing documents, including the HUD-1 (Housing and Urban Development). In 2004 you added a swimming pool, sun deck and an additional bedroom. You now need to update your files and records to include all of these costs with the associated documentation.
- Know the rules for record retention –  generally, you should keep all of the necessary files which ae required to support your tax return for three (four for a small business owner) years after the due date for the tax return, plus any tax return filing extension periods. For example, your 2010 tax return was initially due on April 18, 2011.  Normally, you would be required to retain all of your tax return records until April 18, 2014. However, since you requested an automatic six-month extension of your time to file your 2010 tax return, you will be required to retain your tax return files and records until October 17, 2014 (2015 if you are a small business owner). There is another important rule to remember. There is no statute of limitations for a review or audit of your tax return if you understated or misstated your income!
- Capital assets and investments – the three-year rule does not apply for these tax items. You’ll need to continue to keep the tax records and documents for your personal residence or second home as long as you own the assets.  The original purchase documents and records for stocks, bonds, mutual funds, etc follow the same record retention rules. Special rules apply for both inherited assets and investments. Consult with the trustee, executor, or your tax preparer.
- Supporting statements and documentation -  tax auditors and tax return preparers are not clairvoyant. They did not accompany you on your business trip to Los Angeles in October 2010. Obtain and retain the required documentation and statements for your hotel bills, meals, travel, transportation, etc.  Whenever it is appropriate, I always encourage my tax clients to prepare a letter or memorandum for their tax records regarding the facts and circumstances for reported income or a claimed deduction that should also  include the facts and explains the rationale which was used by the taxpayer. You should always cite the appropriate page and section of the applicable tax return instruction, and if available, the tax code.  These documents will become invaluable to you and your tax preparer or tax attorney during a tax return audit (or review)!
- Use the Internet – almost everyone in America has access to and uses the Internet.  Identify a favorite website for tax law news information, i.e. http://money.cnn.com  or use your favorite search engine (Google, Bing, Yahoo) to obtain your preliminary information. Then go to THE authoritative sources – http://irs.gov and your state department of revenue websites. Each year, usually in December or January, the IRS issues Publication 553, “Highlights of XXXX Tax Changes” which summarizes the key changes in the tax laws for that year. It is also available in HTML format, i.e. http://www.irs.gov/newsroom/article/0,,id=120227,00.htmlÂ
Keep Good Records Now to Reduce Tax-Time Stress
You may not be thinking about your tax return right now, but summer is a great time to start planning for next year. Organized records not only make preparing your return easier, but may also remind you of relevant transactions, help you prepare a response if you receive an IRS notice, or substantiate items on your return if you are selected for an audit.Here are a few things the IRS wants you to know about recordkeeping.1. In most cases, the IRS does not require you to keep records in any special manner. Generally, you should keep any and all documents that may have an impact on your federal tax return. It’s a good idea to have a designated place for tax documents and receipts.2. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
- Bills
- Credit card and other receipts
- Invoices
- Mileage logs
- Canceled, imaged or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
- A home purchase or improvement
- Stocks and other investments
- Individual Retirement Arrangement transactions
- Rental property records
3. If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
- Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
- Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
- Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
- Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks
For more information about recordkeeping, check out IRS Publication 552, Recordkeeping for Individuals, Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
- Publications 552, Recordkeeping for Individuals (PDF)
- Publications 583, Starting a Business and Keeping Records (PDF)
- Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)
YouTube Videos:
Record Keeping English | Spanish | ASL