Why Every Taxpayer Needs a Paper Filing Trail
Do you ever think about the incredibly important role of documentation in a taxpayer’s life? The medium itself may change consistently, ranging from paper to email; but, regardless of the format, all taxpayers should maintain a thorough document trail.
Why does any of this matter? Let’s find out why.
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‘If It Isn’t Documented, It Didn’t Happen’
There’s a saying in the auditing community, according to David Levi — CPA, PFS and senior managing director for CBIZ MHM: “If it isn’t documented, it didn’t happen.”
No matter which form of documentation you use for your taxes, Levi said having these documents to prove what you are claiming is critical.
“In your economic life, or that of your business, without documentation and/or explanation, any deposit could be income and any expenditure could be disallowed,” Levi said. “You have to prove the deposit was from a line of credit, or, if not, could be income. You have to prove what the expenditure was for or else it is not deductible.”
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Plan for the Worst, Hope for the Best
Planning for the worst-case scenario as a taxpayer means facing a potential IRS audit. If this is something you may be subjected to, Thomas J. Williams, EA and co-founder of Deducting the Right Way, recommends maintaining a physical and digital document trail.
“Sometimes you’ll need to retain the original paperwork, such as titles, identification records and estate planning documents,” Williams said. “Plan for the worst-case scenario, but hope for the best.”
Speaking of audits, Deltrease Hart-Anderson, IRS-enrolled agent at D. Hart Accounting Practitioner, LLC, said the IRS typically has three years to audit a tax return. If the IRS suspects your tax return was prepared in a fraudulent manner, Hart-Anderson said, they have “forever” to audit the return — which makes maintaining documentation all the more paramount.
Just as a lot can change in the life of a taxpayer who works alongside an accountant, so can the life of said accountant.
Eric L. Green, founding partner at Green & Sklarz LLC, said accountants have a tendency to retire, vanish and even die. This can lead to serious complications for clients who have entrusted their returns to their accountants.
“We get brought in often when a client’s returns are being audited and the accountant cannot be located or has died and the client now does not have copies of the actual return filed,” Green said.
This is why Green said it’s important for clients to keep copies of their tax returns. Do not entrust them only in the care of accountants. While Green said electronic scanned copies are fine, clients need to be able to access the complete returns. Otherwise, they are operating at a disadvantage when dealing with the IRS or state taxing authorities.
Assets Are Involved
Whether you are filing as an individual, as a couple or as a business owner, paper trails become important when assets are involved, Hart-Anderson said. These include tangible items such as houses or cars and intangible items such as stocks and cryptocurrency.
“Even if there’s no sight of an audit,” Hart-Anderson said, “you will want a paper trail of how the asset was acquired, date of acquisition as well as cost or fair market value at the date of acquisition.”
The Taxpayer Is Getting Married
If you just got married or are getting married, Hart-Anderson recommends creating a documentation trail. This will help determine whether it’s best to file jointly with a new spouse.
“If your new spouse was previously married and accumulated tax debt with the former spouse, you will want a paper trail,” Hart-Anderson said. “This paper trail would determine who’s responsible for the tax debt.”
The Taxpayer Is Getting Divorced
Similarly, if you are getting divorced, Hart-Anderson said a paper documentation trail can be important when splitting assets as well as determining tax liability responsibilities.
The Value of Print Tax Documentation
Record keeping, especially in print format, provides short- and long-term value to taxpayers. From the short term, Hart-Anderson said, taxpayers may be able to reduce their current tax year liabilities and make smart financial decisions.
In the long term, careful record keeping can keep even more money in an individual’s and business owner’s pockets. “The right tax plan can be utilized by business owners,” Hart-Anderson said, “saving them tens of thousands dollars for several years.”
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