Once you’ve purged a box of financial clutter, you’ll be on a roll.
By Mary V. Danielsen: Documented Legacy, LLC
Saving, compiling and recording hundreds of receipts and other tax records that are needed to file our income tax returns each year is drudgery. As April 15 approaches, many look at the piles of paperwork and wonder how much do we really have to save forever. If you want to protect your assets without becoming a paperwork hoarder, you now have options with mobile scanning.
Let’s face it, saving and recording hundreds of receipts needed to file our income tax returns each year is drudgery. Maintaining years of tax returns in old cardboard boxes is a burden. Like cleaning the shower it’s a responsibility we must undertake at home, but most people don’t look forward to it.
Let’s take a look at how to manage your old tax records, why you should save them and how scanning documents with a Flip-Pal mobile scanner will lighten the record keeping load. Once you’ve purged a box of financial clutter you’ll be on a roll.
This is a great idea you to get started and share with family members. Anticipate they’ll want to borrow your scanner so they too can work while watching television.
The Savings Plan
According to the Internal Revenue Service website, an individual must save federal tax records until the period of limitations for that return runs out. That time frame varies from four to seven years depending on the purpose for the filing.
- The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.
- The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax.
Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You’ll need these records to determine any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.
The seven-to-10-year mark is a safe range for maintaining hard copy documents. There are some shorter periods, depending on the period of limitations. Still, there are many reasons to save older returns.
Why Keep It
The main reason to keep documents is for your own benefit. Older records don’t have to be the original hard copies, just something to help you find the information later on.
If the federal government has a question on your tax return it can review all tax records going back 10 years. Another big reason to save these records is to prove the years you worked, the assets you bought and sold and deductions that you may later claim.
Your tax records may no longer be needed for tax purposes, but don’t shred them until you see if you need them for other purposes. For example, an insurance company or creditors may require you keep them longer than the IRS. Many tax experts suggest retaining your actual tax returns indefinitely in case you or your heirs need access to the information they contain. As well, each state has its own statue of limitations.
Mistakes Happen. Say for instance, you decided to retire next year, but upon checking with the Social Security Administration they have you seven quarters short of qualifying for social security. You knew you worked the years they now claim you didn’t. You need those old tax records to prove you did.
All this makes a strong case for scanning. It’s a safety net on your financial health.
How and What to Scan
If your returns are called into question or you have to prove something that’s been filed in the past, you can use scanned images. The IRS has accepted scanned receipts since 1997, a policy memorialized by Rev. Proc. 97–22 . You need to ensure that your electronic receipts are as accurate as your paper records and be able to index, store, preserve, retrieve, and reproduce the records. Make certain your records are organized into electronic folders by year and you’re able to produce them in a hard copy form if needed.
If you’ve used a software program to file your taxes, export reports as pdf files. Scan all receipts that support those filings, including W-2 and 1099 forms, bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, letters for charitable donations, receipts for tax-deductible expenses, and any other records to support deductions or credits you claim on your return. Self-employed persons should also keep copies of any accounting records.
Where your hard record files become bulky is with all those little slips of paper, receipts, and proof of purchases. Scanning will free up space and preserve them before they fade.
Watch this video on using the flip-and-scan method to quickly scan small loose objects. Set your Flip-Pal mobile scanner at 300 dpi and you can scan about 300 images an hour.
Back It Up
There’s nothing worse than a crashed hard drive or information stored on a defunct computer. Back up your imaged documents to an external hard drive, archival-grade DVDs or a dedicated Picture Keeper PK8. We recommend two forms of backup, with one stored in a fireproof safe. Remind yourself next tax season to check your backups to ensure they’re working properly. There are options for storing financial information on cloud-based storage sites, but do you homework first to determine their security.
Watch this recorded webinar on backing up using the 3-2-1 method.
As a reminder of how scanning legal documents could save you money, we once did a webinar on preparation for fire where we tallied the costs associated with reproducing family documents (i.e. driver’s license, birth certificate, and marriage license). One New Jersey family’s example would cost $1,200 and two weeks of time to replace everything. Imagine the relief tax scans could provide.
Watch this recorded webinar on preparing for fire and other events that could threaten your photos and documents.
Shred Don’t Toss. Identity theft is a big issue during tax season as people tend to toss old records in the trash or recycling bins. You don’t want private information floating out in wasteland. Find out from your local government when the next free shredding event is scheduled or buy a shredder. Many office supply chains also have secure shredding services.
- IRS: Tax Scams and Consumer Alerts – includes links to youtube videos.
- IRS: Report Phishing
Family History & Taxes:
Planning a family memoir? Early tax records are a gold mine for genealogists.Your old records clarify where you lived, jobs you worked, household income and the key expenses of the year. For instance if you were describing having four children in college in the early 1980’s you could include your annual salary and educational expenses as details to the challenges you faced.
- IRS website: How Long Should I Keep Records
- Social Security Administration: Frequently Asked Questions