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Recordkeeping for Individuals - General Requirements

Gathering together all of the records you need to prepare a tax return can be very tedious. However, it is essential that you gather the right information so that your return can be prepared properly. Maintaining records is critical. If the IRS should select your return for audit, you'll be prepared. Good recordkeeping is your first line of defense against many penalties.

What are the basics? While your records must be accurate, the IRS generally does not require any particular form of recordkeeping. A cancelled check is a very good record of having paid a particular expense. In the past, this was easy to do because banks routinely sent cancelled checks to their customers. Today, most banks do not. Every bank is different. Be sure to check your bank's policies; some send photocopies, others line item descriptions.

You also should keep receipts, sales slips, and invoices that refer to any item on your return. Once your return has been prepared and items have, in fact, been included in the return as deductions or in some form or another, it is imperative that you have records supporting the claimed tax treatment.

Good recordkeeping is also important to track income. For most people, their most important record of income is their Form W-2 showing wages from employment. You may also have one or more Forms 1099. There are a whole series Forms 1099 showing interest, dividends and other types of income, which you should keep, along with financial statements from brokerage houses.

Don't forget to keep copies of your tax return. Also, keep copies of related schedules and attachments with the returns. You also should permanently retain certain documents. For example, don't discard trust documents, wills, partnership agreements, business contracts, divorce decrees, leases and the like.

Another question that arises with respect to recordkeeping is how long you need to keep the records. The short answer is you need to keep them for as long as the IRS can potentially challenge you on the item to which a particular record relates. This period generally is three years from the date you file your income tax return or, if later, two years from the time you pay the tax. If you file your return before the due date, the IRS gets to measure the three-year period from the actual due date. Sometimes, the IRS has six years. There is no limit for the IRS to bring an action against someone who has filed a false or fraudulent return.

In some cases, you should keep records longer than the regular limitations period. For example, you should permanently keep records of your basis in property. Basis is the yardstick for measuring tax gain or loss and usually is the amount you paid for property and major improvements to it.

If you have any questions about the recordkeeping matters touched upon here or have specific recordkeeping questions, please give us a call.

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, information contained in this article is not intended by TOPC Potentia P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

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