Make 2012 a “Record Year” for Taxes
The IRS generally requires taxpayers to shoulder most of the recordkeeping responsibilities. If you have not kept the necessary tax records in the past—or if your recordkeeping has been inadequate—make it your New Year’s resolution to improve in 2012.
Despite the hassle, you can make the process go a lot smoother if you organize your records in a logical fashion. Furthermore, using electronic recordkeeping methods may help simplify matters.
Most important, don’t wait until later in the year to get going. The longer you wait, the harder it will be. In the worst-case scenario, you will not have the records to support your claims when it is time to file your tax return. Here are several ways you may be able to relieve some of the stress.
- Keep a diary or ledger to record expenses that may be claimed as itemized deductions. The list includes interest expenses, charitable contributions, state and local income taxes, medical and dental expenses, miscellaneous expenses, casualty and theft losses, etc. You may want to maintain a separate diary for a detailed category of expenses.
- Set up a filing system for expenses and income. You might keep infrequent items together in a separate folder. However, travel and entertainment expenses should be handled separately due to the extensive substantiation requirements. In general, you must document the date, amount of the expense, the business purpose and other details (depending on the nature of the expenditure). You must keep receipts for items of $75 or more.
- Review your expenses on a regular basis. It is much easier to utilize tax planning during the year if you know where you stand. For instance, you might total up the expenses recorded in your diary at the end of each quarter. If you wait until the year is over, it may be too late to take action.
- Store your records in a safe place. Even the best record-keeping system will not do you any good if you cannot retrieve the records. Consider storing valuable documents in a fire-resistant strong box. You might keep check registers, credit card statements and the like in a safe deposit box. Back up any electronic records.
- Adjust your system over time as needed. No matter what kind of recordkeeping system you decide to adopt, try to remain flexible. A change in circumstances—for example, the purchase of a home—may require changes in your setup. Reminder: The system is for your benefit, not your burden.
Normally, the statute of limitations on IRS adjustments is three years. But the limit is doubled to six years for a return that omits 25% or more of an individual’s income. And there’s no time limit whatsoever if fraud is involved. To be on the safe side, it is often recommended that you hold onto your records for at least ten years.
Reminder: Help is just a phone call or e-mail away. Your professional tax adviser can provide assistance in this area. In addition, you can discuss tax-saving opportunities that may be available on your 2011 return.