The IRS requires documentation when it comes to claiming deductions and tax credits. Though the IRS doesn’t require any special method for keeping records, it’s always a good idea to keep them organized and in one place. If you are ever faced with a tax audit, it’s likely the IRS will want you to show proof of the items you claimed on your return. In addition, good record keeping makes it easier when you come in for your appointment during tax season.
When it comes to storing tax records, here are some important tips to keep in mind:
• Keep copies of your filed tax returns along with your tax records. They’ll be helpful in the preparation of future returns and might come in handy when applying for a bank loan.
• Federal law requires you to keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductions you claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs. Check with your state’s department of revenue for record retention guidelines. They can vary.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records—including those related to home improvements—at least three years after you have sold or disposed of the property.†