The first step toward filing your taxes efficiently is getting organized. Once you’re organized, you’ll spend less time sorting through documents and help ensure you pay as little as possible. As you prepare to file this year, use these tips for organizing your tax information.
Create Two Centralized Locations for Information
Before even looking at your tax information, start by creating two centralized locations where all documents will be stored. You’ll want a location for physical documents and one for electronic items. A drawer or filing cabinet works well for physical documents, depending on how many you have. A designated folder that’s secure is good for electronic ones.
Keep Business Expenses and Personal Expenses Separate
If you have any form of business, make sure all of your business and personal expenses are kept separate. You should have a separate checking account and credit card (if you use one) for your business, and those should be used only for your business. When you give yourself a payday, transfer funds from your business account to your personal one.
Having separate accounts will both make it easier to file taxes and make sure your deductions are clear if you’re audited. In the event of an audit, separate accounts show distinct income and expenses so that the IRS can accurately determine deductions.
Keep in mind that you should use this best practice of separate accounts regardless of how much your business earns. Whether you’re an established self-employed individual or someone who does gig work on the side, all business expenses ought to be separated out. Even startups that don’t yet have positive revenue should have a separate account to show expenses.
Follow the Seven Years or Forever Guideline
The stipulations on how far back an IRS audit can go are somewhat complex, but the implications for document retention are fairly simple to follow.
There isn’t a statute of limitations on how far back the IRS can go if they identify fraud or believe you never filed a return. Therefore, your return and essential documents (e.g. W-2s, 1099s, etc.) should be kept forever.
If there’s a major error, however, the IRS can only go back six years. Because of this limitation, supporting documents (e.g. receipts) only need to be kept for seven years (six years of audit plus the current year). Eliminating these unnecessary documents after seven years will help clear up your designated tax document storage places.
Standard audits can only go back three years, but there’s always a possibility of a major error that constitutes six years’ worth of auditing. It’s not advised to keep documents for only three or four years — seven is better.
Get Help Filing Taxes
If you’d like assistance filing taxes and more tips for organizing your tax information, contact the tax professionals at Tostrud and Temp LLC at 608) 784-8060. Our certified accountants will help you review all necessary documentation and accurately file your taxes.