Poor record-keeping puts tax deductions at risk

Real Estate Tax Talk

Filing your tax returns on time is only half the battle with the IRS. The other half — or more– is keeping good records. Lack of adequate records is by far the main reason taxpayers lose deductions in tax audits.

You need to have copies of your tax returns and supporting documents available in case you are audited by the IRS or another taxing agency. You might also need them for other purposes — to get a loan, mortgage or insurance, for example.

How long to keep your tax records

You should keep your records for as long as the IRS has to audit you after you file your returns for the year. These statutes of limitation range from three years to forever. They are listed in the table below.

If:

The IRS audit limitations period is:

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You failed to pay all the tax due

3 years

You underreported your gross income for the year by more than 25%

6 years

You filed a fraudulent return

No limit

Thus, you should keep copies of your tax records for at least three years. Keep them six years if you may have underreported your income by 25 percent or more.

Keep your long-term asset records for three years after the depreciable life of the asset ends. For example, keep records for five-year property (such as computers) for eight years.

What records to keep

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return. These include bills; credit card and other receipts; invoices; mileage logs; canceled, imaged or substitute checks; proofs of payment; and any other records to support deductions or credits you claimed on your return.

Mileage, entertainment and travel deductions

You need to take special care to keep records supporting business mileage, entertainment, meals and travel deductions. These deductions are always hot-button items for the IRS because many people wildly inflate them — either because they’re dishonest or because they haven’t kept good records and make estimates of how much they think they must have spent.

For this reason, special record-keeping requirements apply to these deductions. You need to keep receipts, canceled checks, and credit card slips for entertainment, meal, gift or travel expenses that exceed $75. These records must singly, or together, prove five facts:

  • the date the expense was incurred;
  • the amount;
  • the place where the expense was incurred;
  • the business purpose for the expense; and
  • if entertainment or meals are involved, the business relationship of the people present.

For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.


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