Once you’ve completed your taxes and amassed all your receipts, forms, and statements, what do you do next? What gets kept and what gets tossed? Remember, the main reason to save records of any type is to substantiate the information reported on tax returns.

According to the (federal) General Accounting Office, they are more accurately able to identify where taxes are being underreported. In consequence, the IRS is stepping up audits and enforcement from 2006. It is therefore essential that taxpayers keep their records and receipts organized and easy to find.

Save:

• Copies of your completed tax returns, attachments, and receipts that verify receipt of your filed forms by the IRS.
• Records that help identify sources of income including those that:

• Track expenses;
• Determine the value of property; or
• Support any numbers or claims made on your prepared tax returns.

Place your records in files listing the year and the following titles: Income, Expenses, Home, and Investments. You can safely toss other paperwork in the trash unless you prefer to keep items for historical value.

Property: What types of records may affect future transactions? It’s important to keep records that substantiate the value of property is if the property may one day be a gift. This is because the donor-taxpayer's income tax basis (i.e. giver’s cost basis) in the property carries over to the donee. After 2009, step-up (and step-down) in basis will be replaced by modified carryover basis. New rules may severely impact cumulative tax-free exchanges of real property, if you can’t provide accurate records

Business: Small businesses, sub-chapter S corporations, and partnerships are all responsible for keeping track of the adjusted basis of their shareholders. Keeping it up-to-date is much better than waiting until you need it for tax purposes later. Just ask us to help you with this now.

Other statements that may affect future transactions include:

• Investment account statements and home expenses. These are important to keep as long as you own the investments, plus a minimum of three years afterwards unless your state requires a longer statute of limitations.
• Gifts and inheritances that establish values.

Following the statute of limitations set by your state is a good rule of thumb for saving all records, though a reasonable general rule is to keep six to ten years of substantiation. Of note to remember: A return that was never filed has no statute of limitations. Also, the statute of limitations for returns where income was understated by 25 percent or more is six years.

After you file this year’s records with those from past years, weed out old files that are beyond the statute of limitations. But, before tossing, examine receipts once more to see if they contain information for future transactions. If not, go ahead and toss them.

Use technology to condense: The new ‘Check 21’ regulations allowing banks to send copies of cancelled checks in bank statements can make it easier to keep cancelled checks in an organized, space-saving manner. Another space-saving measure: scanning your documents and writing them to a CD or DVD. With scanners readily available, it’s easy now to condense all your records for a year down to one CD, including a copy of the tax return. At Salem Tax & Financial, we’re happy to give you your tax return on a CD. It's much easier to keep six CDs than six years worth of shoe-boxes. An added benefit is that you don't have to worry about the fading of thermal paper receipts, which can happen if you store your original records in the attic. Keep or toss . . . if only it was as easy as it sounds.