Keep track of financial records: You may need them

Although a recent law may lead you to believe it's safe to throw away some

financial records gathering dust in your file cabinet, think again.

A 1998 law shifted the burden of proof to the Internal Revenue Service in

cases brought before the tax court. But this shift of burden applies only

to cases brought into court and does not include IRS audits.

If you are audited, the burden of proof lies squarely on your shoulders.

You must substantiate anything you claim on your tax return. Without records

to substantiate your claims, an IRS auditor will disallow the deductions.

And even if you do wind up in court, the burden of proof will be on you

if you have not cooperated with the IRS. One measure of cooperation is whether

you produce the records requested by the IRS.

Additionally, the law requires you to keep certain records for specific

lengths of time, but you're not required to keep the records in any particular

way. The best approach is to keep them in a manner that allows you and the

IRS to easily determine your correct tax.

Using your checkbook is a good way to keep a record of your income and expenses.

Make sure you record amounts, sources of deposits and types of expenses.

You also need to keep documents, such as receipts and sales slips, which

can help prove a deduction. You should keep your records in an orderly fashion

and in a safe place. Keep them by year and by type of income or expense.

One method is to keep all records related to a particular item in a designated


To protect yourself against all eventualities, I recommend that you retain

the following records indefinitely:

* Copies of filed tax returns.

* Tax and legal correspondence.

* Audit reports.

* Business general ledgers and journals.

* Financial statements.

* Contracts and leases.

* Real estate records.

I recommend that you retain the following records for six years:

* Bank statements and deposit slips.

* Business sales records and journals.

* Employee expense reports.

The following records should be retained for at least three years if you

have a sideline business:

* Paid vendor invoices.

* Employee payroll expense records.

* Inventory records. (Keep inventory records indefinitely if you use the

last-in, first-out inventory method.)

Retain depreciation schedules and other capital asset records for the tax

life of the asset, plus three years.

— Zall is a free-lance writer based in Silver Spring, Md., who specializes

in taxes, investing and business issues. He is a certified internal auditor

and a registered investment adviser. He can be reached via e-mail at [email protected]

To read more from Milt Zall (Bureaucratus), type "Zall" in the search box



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