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Basic records are the documents that everybody should keep. These are the records that prove your income and expenses. If you own a home or investments, your basic records should contain documents related to those items.

Why Keep Records?

Identify sources of income

Your records can identify the sources of your income to help you separate business from non-business income and taxable from nontaxable income.

Keep track of expenses

You can use your records to identify expenses for which you can claim a deduction. This helps you determine if you can itemize deductions on your tax return.

Support items reported on tax returns

The IRS may question an item on your return. Your records will help you explain any item and arrive at the correct tax. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.

Important Note:

If you receive a Form W-2, keep Copy C until you begin receiving social security benefits. This will help protect your benefits in case there is a question about your work record or earnings in a particular year.

Proof of Payment:

One of your basic records is proof of payment. You should keep these records to support certain amounts shown on your tax return. Proof of payment alone isn't proof that the item claimed on your return is allowable. You also should keep other documents that will help prove that the item is allowable.

Generally, you prove payment with a cash receipt, financial account statement, credit card statement, canceled check, or substitute check. If you make payments in cash, you should get a dated and signed receipt showing the amount and the reason for the payment.

If you make payments using your bank account, you may be able to prove payment with an account statement.

Account statements: You may be able to prove payment with a legible financial account statement prepared by your bank or other financial institution.

How Long to Keep Records:

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, it is 3 years from the date of filing the tax returns unless the taxpayer filed a fraudulent tax return or under reporting of income.

The IRS doesn't require you to keep your records in a particular way. Keep them in a manner that allows you and the IRS to determine your correct tax.

You can use your checkbook to keep a record of your income and expenses. You also need to keep documents, such as receipts and sales slips that can help prove a deduction.

To Summarize:

  • Every Taxpayer shall keep their records for at least 3 years from the date of filing their tax returns.
  • The taxpayer shall keep the documents with respect to Income and all the items claimed as either deduction or credit.
  • It is advised to keep the W2 documents until you start receiving the Social Security Benefits.
  • IRS may come back anytime within 3 years seeking supporting documents related to any/all of the items including income reported on the tax returns.
  • It is very important especially when the taxpayer claims Itemized Deduction instead of Standard Deduction on the tax return. For every deduction that you are claiming under Itemized Deductions, taxpayer must be able to maintain appropriate proof of payment which may include receipts, cancelled checks, bank and/or credit card statements.
  • If the taxpayer would not be able to substantiate the expenses claimed when sought by the IRS, then the IRS has every right to collect the taxes which the taxpayer claimed through itemization