Murphy’s Law says that if anything can go wrong, it will. I think that a tax corollary to Murphy’s Law is that if the IRS asks you for a particular record, that will be the one record you can’t find.
The best way to make sure that Murphy’s Law doesn’t find you lacking if the IRS comes calling is to institute an organized recordkeeping regimen today.
Five Reasons to Make Good Tax Recordkeeping a Priority
1. Good records allow you to identify your sources of income.
During the course of a year, you may have income from different sources, such as employment, investments, and other miscellaneous places. You should keep track of business, non-business, taxable and non-taxable income, including income you receive in cash. Failure to report taxable income is a bad idea. Don’t do it.
2. Good records allow you to keep track of expenses.
Some of those checks you write or cash payments you make during the year may be deductible, such as property tax payments, business expenses, and charitable contributions. Don’t shortchange yourself by failing to keep copies of all your deductible expenses.
3. Good records will help make filing your income tax return much less painful.
Let’s face it; one of the hardest parts of doing your taxes each year is finding all the information you need to complete your return. Just imagine how much less stressful it will be around April 15 each year if you can pull out all your tax records, and they are all there and nicely organized. Writing a check to Uncle Sam might still put a lump in your throat, but at least you won’t be pulling your hair out trying to find records scattered high and low in your house.
4. Good records will allow to know what the tax basis of your property is.
If you sell property, such as your home, during the year, you will need to know what your gain or loss was on the sale. In order to know that, you will need to know the tax basis of your property. Keeping records of how much your property cost and how much you have spent improving it over time will allow you to figure out your property’s tax basis.
5. Good records will enable you to answer questions from the IRS with confidence and accuracy.
Although only about 1% of returns are audited by the IRS each year, Murphy’s law stands for the proposition that you will be among those unlucky few who will receive an audit notice from the IRS, particularly if your records are not in order.
If the IRS questions items on your tax return, and you are unable to substantiate what you reported on your Form 1040, you may very well find yourself paying more tax and even penalties and interest to Uncle Sam. Generally, the burden is on you to support the numbers you report on your tax return. If your tax records are in good order, an IRS audit will seem more like a minor annoyance than a major crisis.
In short, a word to the wise is sufficient. In this case, four words-Keep good tax records!