Wading through a pile of statements, receipts and other financial documents when it’s time to prepare a tax return can be frustrating for people who haven’t managed their records. By knowing what they need to keep and how long to keep it, people can develop a good recordkeeping system year-round and make filing their return easier.
Good recordkeeping can also help you understand a situation when you receive letters or notices from the Internal Revenue Service (IRS) or Franchise Tax Board (FTB)
Good records help:
- Identify sources of income. You may receive money or property from a variety of sources. The records can identify the sources of income and help separate business from non-business income and taxable from nontaxable income.
- Keep track of expenses. You can use records to identify expenses for which you can claim a deduction. This will help determine whether to itemize deductions at filing. It may also help you discover potentially overlooked deductions or credits.
- Prepare tax returns. Good records help you file your tax return quickly and accurately. Throughout the year, you should add tax records to your files as you receive them to make preparing a tax return easier.
- Support items reported on tax returns. Well-organized records make it easier to prepare a tax return and help provide answers if the return is selected for examination or if you receive an IRS or FTB notice.
You should develop a system that keeps all your important information together. You can use a software program for electronic recordkeeping. You could also store paper documents in labeled folders.
Records to keep include:
- Tax-related records. This includes wage and earning statements from all employers or payers including payment apps or cards, such as Form W-2, 1099-K, 1099-Misc, 1099-NEC. Other records include interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents and records of virtual currency transactions. You should also keep receipts, canceled checks, and other documents that support income, a deduction, or a credit reported on your tax return.
- IRS letters, notices and prior year tax returns. You should keep copies of prior year tax returns and notices or letters you receive from the IRS. These include adjustment notices when an action takes place occurs on your account.
- Property records. You should also keep records relating to property you dispose of or sell. You must keep these records to figure your basis for computing gain or loss.
- Business income and expenses. Business taxpayers should find a bookkeeping method that clearly and accurately reflects your gross income and expenses. If you have employees, you must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
- Health insurance. You should keep records of your own and your family members’ health care insurance coverage. If you are claiming the premium tax credit, your will need information about any advance credit payments received through the Health Insurance Marketplace and the premiums you paid.
Need help determining which records to keep and for how long? Visit our Retention-Guides page!