Record Keeping

Income tax regulations place the burden of proof on the taxpayer. Because of this, to prepare your tax return, you need to keep accurate records that support the income, expenses and credits you report. Generally, these are the same records you use to monitor your business or track your personal finances.

If you operate a business, your records must be available for inspection by the IRS or other tax authority. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.

For more information about record keeping, click one of the links below:

  • Types of records to keep
  • How to keep track of your expenses
  • Proof of expenses
  • Length of time to keep your records
  • How to handle an audit notice
Types of records to keep

What records does the individual taxpayer need to keep? You should keep copies of your tax return information with all the supporting documents. You should keep documents that identify sources of income and expenses. You should also keep documents to back up claims for credits, as well as for adjustments and deductions. Items that can be used as records for income and investments include Forms W-2, Forms 1099, bank statements, brokerage statements and mutual fund statements. Items that can be used as records for expenses include canceled checks, receipts, sales slips, invoices, and account statements. If you own your home or sell real estate you own, keep records such as closing statements (when purchased and when sold), mortgage statements, purchase and sales invoices, proof of payment, insurance records, receipts showing costs of improvements, and Form 2119, Sale of Your Home (if you sold a home before 1998).

How to keep track of your expenses

You must be able to substantiate the business use of a vehicle with written documentation. This generally includes a record of the dates of business trips, customers visited, purpose of the trips, number of business miles traveled, and the total number of miles the vehicle was used during the year. If you deduct actual expenses, you must save records for gas, oil, insurance, licenses, and other car maintenance receipts.

You must be able to prove your deductions for travel, entertainment, business gifts, and local transportation expenses. You should keep adequate records or have sufficient evidence that will support your statement. When required for medical reasons, your miles traveled to and from the doctor, pharmacy, or hospital and travel away from home are deductible and should be recorded.

Keep records of your volunteer expenses and your charitable mileage that is directly incurred in giving services to a charitable organization. Keep your receipts or canceled checks from recognized charities. A receipt or bank record is required for all cash contributions and must include the name of the charity, the date, and the amount of the cash contribution.

Proof of expenses

To deduct an expense on your tax return, you must be able to prove that payment was made and the payment was for something deductible. In most instances, the IRS has considered a cash receipt or canceled check as adequate proof of payment. However, because some banks no longer return canceled checks, the IRS will accept certain other information from a bank account statement as proof of payment. The statement must show the check number, amount, the date the bank posted the check to the account, and the name of the payee.

If you pay for expenses by credit card or electronic funds transfer, you also may be able to use an account statement to prove expenses. For electronic funds transfer, the statement must show the amount transferred, the date the transfer was posted to the account, and the name of the payee. For credit cards, the statement must show the amount charged, the transaction date, and the name of the payee. If the expenses are withheld from your paycheck, you can use your pay statements to prove payment.

Once proof of payment has been established, it is still necessary to determine the tax treatment of that payment. It is important to keep other documents, such as detailed receipts listing the items purchased, to show the relationship between those expenses and the deduction claimed.

Length of time to keep your records

If there are any transactions which you feel might be questioned in the future, be sure to retain your canceled checks and documentation. You should keep records as long as they are relevant for your tax situation. For example, if you take a deduction for property you use in your business, including standard mileage for a vehicle, you should keep records for that property for at least three years after you dispose of the property. Although it is important to keep your tax returns and records for at least three years, if the IRS suspects fraud, it may request information beyond that time span. If you have any questions on what to keep, consult your neighborhood Jackson Hewitt Tax Service office.

How to handle an audit notice

If you receive a notice in the mail from the IRS or other tax authority, it is important to respond promptly. It is wise to consult a tax professional who may be able to resolve the issue by mail.