As the year goes by most people only tend to think about taxes when they see what is left of their paychecks every couple of weeks. If you take any sort of itemized deductions, run a small business or own rental properties you really should be thinking about taxes almost every day. There are things that can be done throughout the year that can help keep more of that hard earned money.
One of the most important, simple and yet often overlooked things to do is keep proper records. You should have a copy of every item that is being claimed on your tax return. My recommendation is to keep copies of tax returns as well as any documents to substantiate all income and expenses for 5 to 7 years. If you make certain significant transactions like purchase property or have investments you should keep those records for as long as you own the asset. With today’s technology and smart phones maintaining proper records has become even easier than it was before. There are apps that can track your car mileage and that keep copies of receipts from your phone in a format that is easy to organize. The IRS fully accepts these digital records and I personally try not to permanently store paper documents at all in the office. Spreadsheets work great for small consulting gigs and employee expenses that are reimbursed or unreimbursed. Any businesses that use accounting software the IRS will request the full company program file during an audit. If you must stay in the stone age at least get a folder or envelope to keep all receipts and important documents.
Taxpayers have a “burden of proof” to maintain these records to substantiate any tax deductions that are taken each year. The IRS and state taxing agencies are stepping up enforcement with more audits every year. Returns that claim employee business expenses or file a schedule C have an increased chance of being audited as well. Maintaining proper records can save you countless hours of time and thousands of dollars in interest and penalties from disallowed deductions. Even though I thoroughly enjoy fighting for my clients during an audit they are in no manner a fun activity for anyone responsible for paying the tax bill.
Check out my website for free tools and be sure to follow for important tax news! Once a major tax reform bill is passed we will have a lot more to talk about.
Thanks for reading!