Income tax regulations place the burden
of proof on the taxpayer. Because of this, to prepare your tax return, you need
to keep accurate records that support the income, expenses and credits you
report. Generally, these are the same records you use to monitor your business
or track your personal finances.
If you operate a business, your records
must be available for inspection by the IRS or other tax authority. If the IRS
examines any of your tax returns, you may be asked to explain the items
reported. A complete set of records will speed up the examination.
more information about record keeping, click one of the links
- Types of records to keep
- How to keep track of your
- Proof of expenses
- Length of time to keep your
- How to handle an audit notice
Types of records to
What records does the individual taxpayer need to keep? You should
keep copies of your tax return information with all the supporting documents.
You should keep documents that identify sources of income and expenses. You
should also keep documents to back up claims for credits, as well as for
adjustments and deductions. Items that can be used as records for income and
investments include Forms W-2, Forms 1099, bank statements, brokerage statements
and mutual fund statements. Items that can be used as records for expenses
include canceled checks, receipts, sales slips, invoices, and account
statements. If you own your home or sell real estate you own, keep records such
as closing statements (when purchased and when sold), mortgage statements,
purchase and sales invoices, proof of payment, insurance records, receipts
showing costs of improvements, and Form 2119, Sale of Your Home (if you sold a
home before 1998).
How to keep track of your expenses
You must be
able to substantiate the business use of a vehicle with written documentation.
This generally includes a record of the dates of business trips, customers
visited, purpose of the trips, number of business miles traveled, and the total
number of miles the vehicle was used during the year. If you deduct actual
expenses, you must save records for gas, oil, insurance, licenses, and other car
You must be able to prove your deductions for
travel, entertainment, business gifts, and local transportation expenses. You
should keep adequate records or have sufficient evidence that will support your
statement. When required for medical reasons, your miles traveled to and from
the doctor, pharmacy, or hospital and travel away from home are deductible and
should be recorded.
Keep records of your volunteer expenses and your
charitable mileage that is directly incurred in giving services to a charitable
organization. Keep your receipts or canceled checks from recognized charities. A
receipt or bank record is required for all cash contributions and must include
the name of the charity, the date, and the amount of the cash
Proof of expenses
To deduct an expense on your tax
return, you must be able to prove that payment was made and the payment was for
something deductible. In most instances, the IRS has considered a cash receipt
or canceled check as adequate proof of payment. However, because some banks no
longer return canceled checks, the IRS will accept certain other information
from a bank account statement as proof of payment. The statement must show the
check number, amount, the date the bank posted the check to the account, and the
name of the payee.
If you pay for expenses by credit card or electronic
funds transfer, you also may be able to use an account statement to prove
expenses. For electronic funds transfer, the statement must show the amount
transferred, the date the transfer was posted to the account, and the name of
the payee. For credit cards, the statement must show the amount charged, the
transaction date, and the name of the payee. If the expenses are withheld from
your paycheck, you can use your pay statements to prove payment.
proof of payment has been established, it is still necessary to determine the
tax treatment of that payment. It is important to keep other documents, such as
detailed receipts listing the items purchased, to show the relationship between
those expenses and the deduction claimed.
Length of time to keep your
If there are any transactions which you feel might be questioned
in the future, be sure to retain your canceled checks and documentation. You
should keep records as long as they are relevant for your tax situation. For
example, if you take a deduction for property you use in your business,
including standard mileage for a vehicle, you should keep records for that
property for at least three years after you dispose of the property. Although it
is important to keep your tax returns and records for at least three years, if
the IRS suspects fraud, it may request information beyond that time span. If you
have any questions on what to keep, consult your neighborhood Jackson Hewitt Tax
How to handle an audit notice
If you receive a
notice in the mail from the IRS or other tax authority, it is important to
respond promptly. It is wise to consult a tax professional who may be able to
resolve the issue by mail.