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Posted 3 months ago

Fear Is a Great Motivator-What Tax Documents to Keep

5-minute read

· Retain a paper copy or receipt of any tax-relevant transaction.

· Keep brokerage statements indefinitely for taxable accounts.

· Keep IRA nondeductible contribution records forever.

· Keep partnership documents, contracts, commission or royalty structures forever.

· Save ALL your tax returns.

If you've ever experienced the anxiety-inducing notice from the IRS, triggering an audit, or worse, the ominous KNOCK on the door, it could be a sign that you're not maintaining sufficient financial documentation.

Once you have an audit, you are probably terrified to part with a single receipt if you have one. Should I save receipts for taxes?

Be aware that the IRS is one of the few courts where failure to produce proof of your claims results in the assumption that you are guilty of tax fraud.

That's why it's crucial to always have a professional by your side in these matters. Just as you wouldn't go to court without a lawyer, you shouldn't face the IRS with a software-generated defense. Imagine saying, 'Your honor, here is my lawyer, Siri.'

So, during these uncertain future days, it's imperative that you protect yourself. Save tax documents. Personal responsibility still falls in your purview. That's why you must save all the financial documents used to create your tax returns to defend yourself in the case of an audit.

The tax courts consistently slap down arguments that rely on something other than actual documentation.That's the big takeaway here. What receipts to keep for a tax return?

So, take some time this week to make sure that you have a workable system that enables you to follow these guidelines:

1. 1) Retain a paper copy or receipt of any tax-relevant transaction. Scan these documents and archive them electronically or acquire them in an electronic format. If the purchase has a manual or warranty, store all the documents in the same electronic or physical location.

Sadly, the IRS has ruled that bank or credit card records are insufficient documentation. As a result, keep your statements long enough to reconcile your account.

If the purchase was a business or tax-deductible expense, record the expense and why it justifies the deduction. Store this information with or on the receipts.

2. Keep brokerage statements indefinitely for taxable accounts. You are responsible for reporting the cost basis of any security you sell to calculate the capital gains tax. Each dividend payment is part of the cost basis for a mutual fund with reinvested dividends. As a result, you can compute the cost based on your complete transaction history.

The IRS could argue that your entire investment value is a gain without the cost-based docs.

If you have lost the record of how much you originally paid for an investment, instead of selling and paying 15% or more of the value in taxes, you can use that investment as part of your charitable giving. Gifting appreciated stock avoids the tax owed and still qualifies for a full deduction. Oddly enough, the IRS still asks for the original purchase date and price for gifted securities, but leaving these blank has no effect on your tax owed.

Many custodians keep several years of electronic copies of brokerage statements available. They must now send any known cost basis electronically when you transfer securities to a new custodian. If your current custodian has the correct cost basis of your securities, you probably no longer need to keep brokerage statements. However, a "better safe than sorry" approach is always advisable with the IRS.

3. Keep IRA nondeductible contribution records forever. You may need those records every year you withdraw money in retirement to show that a portion of the withdrawal is not tax deductible.

Or, to avoid the hassle, you can clear out non-deductible IRA contributions by converting all of your IRA accounts to Roth accounts.

4. Keep partnership documents, contracts, commission, or royalty structures forever. Documents include property records, deeds, and titles, especially those relating to intellectual property. They also include any transfers of value for estate planning purposes.

5. Save ALL of your tax returns. After you file, save the paper and/or electronic copies with the rest of that year's financial documents.

You must keep tax returns and all supporting documentation for at least seven years.

The IRS can audit your return for up to three years from your filing date. However, the three-year limit only applies to good-faith errors.

If the IRS suspects you under-reported your gross income by 25% or more, they have up to six years to challenge your return. And because we can all file for an extension at the October 15 deadline, you must keep your records for at least seven years.

Regardless of those rules, though, no statute of limitations applies if the IRS suspects you filed a fraudulent return. Because the IRS is run and organized by fallible people (with all their attendant biases and emotions), we suggest keeping your tax returns and documents forever. Unfortunately, whenever the IRS challenges you, the burden of producing evidence that your claims are proper rests entirely with you, so you had better have your documentation in order.

Taxpayers collectively spend six billion hours, or 8,758 lifetimes, annually complying with the tax code.

Resolve today to adjust your record keeping. This will provide two big benefits: first, you will be more aware of deductions, and second, you can relax over the dreaded audit—you've got this.

BE THE ROAR not the echo®

Warmly, Janet, the Tax Wizard



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