Keep track of financial records: You may need them
- By Milt x_Zall
- Mar 09, 2000
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 firstname.lastname@example.org.
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