Tax FAQs

FAQs on Record-Keeping

Q.How can my client verify expenses for claims they make on their tax returns?
A.The most important thing for them to do is to always keep good records. Not only will good record keeping aid in protecting them should they ever be the recipients of an audit, it can also help in saving them money on their taxes. Otherwise forgotten deductions will turn up when perusing their records. In keeping good records, they should always document who they paid, when they paid, and the nature of their expense. IRS Publication 526, Record Keeping and How to Report, may assist them in this matter.

Q.What kind of records does my client need to keep claiming a credit for childcare or dependent caring expenses?
A.All documentation relating to amounts paid to a person or center for caring for their child or dependent while they work should be kept. If they have a childcare worker who lives with them, keep records on expenses related to meals and lodging expenses.

Q.What sorts of records are necessary to keep relating to home improvements?
A.If renovations are made to their home that increases the value of that home, they may eventually be able to use these expenses towards tax savings. Although they cannot actually deduct these expenses on their tax return, they may add them to the original price of their home, which will help them, when they sell it. This will reduce the reported gain and the amount of capital gains tax they owe if they sell the house at a profit that exceed the capital gains exclusion, which is $250,000 for single filers and $500,000 for joint filers. Routine repair costs, such as painting, do not count. However, putting on an addition, new roof or installing a new sink does. IRS Publication 530, Tax Information for First Time Homeowners, can provide details about home-related tax deductions.

Q.What records does my client need to keep regarding business use of their automobile?
A.Record the date, time, mileage, person they visited and the reason for the visit when driving their car for business purposes. Even if they decide to take the Internal Revenue Services flat-rate mileage allowance of 32.5 cents per mile, they will still need to keep these adequate records.

Q.How long does my client need to keep their cancelled checks for?
A.Canceled checks are one of the most important aspects of record keeping and they should really try to keep all of them. At a minimum, keep them for at least 6 months. Ones that the IRS may be interested in them should keep for at least 7 years. When in doubt as to the importance of a canceled check, keep it. They may be glad they did.

Q.How long does my client need to keep my tax records for?
A. At a bare minimum, they should always keep their tax records for three years. However, since in cases involving unreported income, the IRS has the right to dig back 6 years, they may want to keep their tax records as long. The type of record can also indicate how long it should be kept. For example, records pertaining to the purchase of a home or it's improvements must be held until they sell that home, and records of nondeductible contributions and distributions of an IRA must be kept until all funds have been withdrawn.