Income tax regulations place the burden of proof on the taxpayer. Because of this, you need to keep good records in order to prepare your tax return. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business or track your personal finances.

If you operate a business, your records must be available for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.

Review the following information regarding record keeping:

Types of Records to Keep
What records does the individual taxpayer need to keep? You should keep copies of your tax return information with all the supporting documents. Copies of Forms W-2 and Forms 1099, any documents relating to your income, canceled checks, and receipts for deductions and mortgage statements should be kept with your tax return. You should also keep documents to back up claims for credits as well as for adjustments and deductions.

What You Need To Track
You must be able to substantiate the business use of a vehicle with written documentation. This generally includes a record of the dates of business trips, customers visited, purpose of the trips, number of business miles traveled, and the total number of miles the vehicle was used during the year. If you take actual expenses, you must save records of gas, oil, insurance, licenses, and other car maintenance receipts.

You must be able to prove your deductions for travel, entertainment, business gifts, and local transportation expenses. You should keep adequate records or have sufficient evidence that will support your own statement. When required for medical reasons, your miles traveled to and from the doctor, pharmacy, or hospital and travel away from home are deductible.

Keep records of your volunteer expenses and your charitable mileage that is directly incurred in giving services to a charitable organization. Keep your receipts or canceled checks from recognized charities. A receipt is required if a single contribution of $250 or more is made.

Proof of Expenses
To obtain a deduction, you must be able to prove that payment was made and the payment was for something deductible. In most instances, the IRS has considered a canceled check as adequate proof of payment.

However, because some banks no longer return canceled checks, the IRS will accept certain other information on a bank statement as proof of payment. The statement must show the check number, amount, the date the bank posted the check to the account, and the name of the payee.

Once proof of payment has been established, it is still necessary to determine the tax treatment of that payment. It is important to keep other documents, such as receipts listing the items purchased, to show the relationship between those expenses and the deduction claimed.

How Long You Should Keep Your Records
If there are any transactions which you feel might be questioned in the future, be sure to retain your canceled checks and documentation. Although it is important to keep your tax returns and records for at least three years, if the IRS suspects fraud, it may request information beyond that time span. If you have any questions on what to keep, consult your local Emerald Tax Service office.

What To Do If You Are Audited
While the IRS is conducting fewer audits than ever before, the odds of being audited depend in part on your income level and type of income. If you receive a notice in the mail from the IRS, it is important to respond promptly. It is wise to consult a tax professional right away because often the IRS request can be taken care of by mail. Emerald Tax Service office provides audit representation for all customers.