What it means
The tax authority does not require a particular filing system, but it expects you to keep records that support what you reported on your return. Typical records include income statements, receipts for deductible expenses, bank and credit card statements, and documents showing the cost of homes, shares and other assets.
The aim is to be able to prove each figure if asked. The publication explains why records matter.
They help you identify sources of income, track deductible expenses, prepare an accurate return and support the amounts you report. Without them, a deduction can be disallowed and the extra tax and penalties may follow.
Retention periods are a central topic. As a general rule, records should be kept for three years from the date you file the return, which is the usual period in which the tax authority may assess more tax.
The period is typically six years if you left out more than 25% of the income you should have reported, and there is no time limit if you never file or the return is fraudulent. Some records need to be kept much longer.
Papers that show the cost or basis of property, such as a home, shares or rental property, should be kept until the period of limitations ends for the year you sell or dispose of the property. Records for a bad debt or worthless security claim are usually kept for longer than the standard three years, and employment tax records for business owners have their own rules.
In practice, many people now scan documents and store them digitally. Electronic records are generally acceptable if they are accurate, complete and easy to retrieve.
A simple system of labelled folders by tax year, backed up in a second location, covers most needs. Businesses and landlords have extra duties.
They should keep records of income, expenses, payroll and asset purchases, and many of these are covered in separate guides. Even for an individual with a modest side income, separating business receipts from personal ones from the first day makes year-end work much easier.
In practice
Real-world examples.
Example
A freelance writer keeps every invoice, a log of business mileage and receipts for equipment. When her return is questioned two years later, she answers within a day by producing the folder for that tax year.
Example
A homeowner keeps the closing statement and receipts for improvements, such as a $25,000 kitchen renovation. When she sells the house years later, the documents help show her cost and reduce the taxable gain. She keeps them in the same folder as the original purchase papers.
Example
An investor holds shares bought at different times and keeps the trade confirmations. When he sells part of the holding, the records show which shares were sold and what he paid for them. This lets him report the gain accurately.
Case study
Seen in the real world.
Greenfield Household is an illustrative, fictional family that received a letter asking about a $9,000 charitable donation claimed on a return filed two years earlier. They had no receipt from the charity and only a note in a diary.
After days of searching they found a bank statement and a donation letter, but the charity's acknowledgement was missing, and part of the deduction was disallowed with interest charged. Following the episode, they began scanning documents monthly into folders by year, with a checklist for large donations.
The illustrative lesson is that the cost of keeping records is small compared with the cost of losing a deduction. A simple routine would have saved the family several hours of searching and part of the tax bill, and the monthly habit now takes them about fifteen minutes.
Watch out
Common mistakes.
- Throwing away records as soon as the return is filed, when you may need them for years if the return is questioned.
- Discarding records about property after the three-year period, when the cost basis may be needed when you eventually sell.
- Keeping a bank statement but no receipt, when the statement may not show what was bought or the business purpose.
Questions
People also ask.
How long should I keep tax records?
A common rule is three years from the filing date, longer in some situations, and records that show the cost of property should be kept until after you sell it and the period for that year ends.
Are digital copies acceptable?
Generally yes, provided they are accurate, readable and can be retrieved when needed, and it is wise to keep a backup in a second location.
What records matter most for a small business owner?
Income records, receipts for expenses, mileage logs and payroll documents are important, as well as proof of the cost of equipment.
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