Tax Basics
A pencil filling out a tax form and a $1 bill in the background
taxes
Are you a tax pack rat?

Sometimes it's good to be a pack rat, especially if you're hoarding the right pieces of paper. So when it comes to taxes, what are the right pieces of paper?

The IRS has created a guideline for basic records, documents that everyone should keep and that you'll probably need when you sit down to fill out your tax forms. Top on the list are the records that prove your income and expenses. Some examples include W-2 forms that contain your income and withholding data, 1099 forms documenting other income sources, bank and brokerage statements. Proof of expenses include sales slips, invoices, receipts and canceled checks.

If you own a house, your basic tax records should contain the closing statement, insurance records and state and local tax receipts. When it comes to investments, hang onto mutual fund statements, brokerage documents and year-end 1099 forms.

Typical tax records to keep
Financial Records
  • W-2 forms that contain your income and withholding data
  • 1099 forms documenting other income sources
  • Bank and brokerage statements
Expense Receipts
  • Sales slips and credit card statements
  • Invoices
  • Receipts
  • Canceled checks
Homeowner's Records
  • Tax records
  • Closing statement
  • Insurance records
  • State and local tax receipts

The IRS does not require you to keep your records in any particular fashion. You can simply keep your records in an orderly manner -- by year and type of income or expense -- and in a safe place.

After you've filed your taxes, what then? There are several reasons to hang on to the paperwork. You should keep copies of the forms and attachments you filed, along with related receipts and canceled checks for three major reasons: an IRS audit, filing next-year's return and applying for a loan.

Audit substantiation

The most obvious -- and dreaded -- reason to save tax paperwork is to have it as backup in case you're audited.

The IRS has three years from the date you filed your return to audit you if it finds an error that it believes you made in "good faith." This can happen, for example, if you misread the tax laws and inadvertently took a deduction or credit to which you're not entitled. This three-year limit also applies if you discover a mistake in your return and file an amended one.

The IRS has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.

And if you filed a fraudulent return, the IRS can audit you any time it discovers your scheme.

Future filing reference

Copies of your past returns also can be handy references. By checking what you filed last year, you can evaluate what your tax situation is this year and see if you need the same forms or possibly new ones.

If your tax situation is substantially unchanged, the saved copies can serve as step-by-step guides to filing your current year's taxes. And tax forms on which you report pension income or IRA values are a good way to keep track of those finances.

Credit support

If you've ever applied for a loan, particularly a mortgage, you know that lenders always want to see your tax returns from the past few years. If you have them on hand it saves time, which means you get you credit sooner, and it could save you money. You can always get copies of old returns from the IRS, but it takes a while and there is a fee for the copies.

 

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