One of the ongoing threads in this blog is the importance of keeping good records for tax compliance.
Keeping accurate records doesn't only help you or your tax preparer to file an accurate return. It also provides you with support for your position if your return is audited by the IRS.
In this post, we will update you on the latest tips from the IRS on gathering the necessary documents for the upcoming filing season.
What types of records does the IRS encourage taxpayers to keep?
The IRS doesn't require any particular type of filing system. But whether the form is electronic or paper, there are certain items you will need.
The basics start with records that prove your income, such as W-2s and 1099s. If you are an independent contractor or consultant who has received multiple 1099s, you will of course have to keep all of those.
You will also want to keep records that show expenses you have that are eligible for a tax deduction or credit.
Earlier this year, we wrote about the documentation needed to deduct business expenses on your taxes. The U.S. Tax Court has ruled that estimates of mileage or meal expenses are not enough. Instead, to deduct such expenses you need a more detailed record, such as log. We wrote about this in our March 21 post.
Other common expenses that it makes sense to track include:
• Charitable gifts
• Mortgage interest
• Child care expenses
Finally, it is natural to ask how long you should keep these records, once you've assembled them. In general, the IRS is only allowed to look back three years when auditing your past taxes. But if there is a substantial misstatement of income or allegations of tax evasion, the statute of limitations period may be extended.