One of the main reasons that you need to keep documents is to substantiate your tax return. Federal law requires you to keep records to support items reported on your tax return.
The Tax Code Section 6001 provides that "every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever necessary, the Secretary may require any person, by notice served upon that person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not that person is liable for tax."
Section 1.6001-1 (a) of the Income Tax Regulations generally provides that persons subject to income tax, or required to file a return of information with respect to income, must keep such books or records, including inventories, that are sufficient to establish the amount of gross income, deductions, credits or other matters required to be shown by that person in any return of such tax or information.
Section 1.6001-1 (e) provides that the books or records required by §6001 must be kept available at all times for inspection by authorized Internal Revenue officers or employees, and must be retained so long as the contents thereof may become material in the administration of any internal revenue law.
That's a lot of words - so what does that mean to me?
You are required to maintain a copy of your tax return including all related schedules and attachments. You must also maintain all documents that support EACH calculation on your return. Gathering all the records you need to prepare a tax return can be very tedious, so it is essential that you gather the right information and it is critical that you maintain this information.
For most people, their most important record of income is their Form W-2 showing wages from employment. You also may have one or more Forms 1099. There is a series 1099 Forms reporting interest, dividends and other types of income, which you should keep along with financial statements from brokerage houses.
Records of your expenses may include bank mortgage statements, real estate taxes, car tab receipts, charitable giving receipts and medical expenses. This also includes documents you have created such as mileage logs for business/medical/volunteer use of a car.
Records to support tax credits or deductions can include Dependent care payment receipts and home energy improvement receipts. If you claim a credit or deduction for college tuition, you will need to keep the 1098-T provided to you by the college as well as proof of payments.
Beginning in 2014, you will also need to keep proof of health insurance for all members of your household. This can include form 1095, health insurance cards and proof of health insurance payments.
Capital gains and losses are recognized when you sell assets. For all assets, you are required to keep records of the asset purchase, any asset improvement and asset disposal or sale. This can include your personal home, rental homes, or stocks and other investments.
If you have a question about your record keeping requirements,
click here to access a detailed list of the personal record keeping requirements on the Resources page of our Website.
Remember if you are ever audited, and you do not have the required documentation, according to the IRS, it did not happen. Deductions can be disallowed and you may end up owing tax with interest and penalties. Also keep in mind that you may be audited years after the event. It is best to gather all of your supporting documents and keep them in one easy to find place yearly as you prepare for your annual tax return.