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Tips on taxes, etc.: Financial organization for the paper-work impaired Friday, August 22, 2008
San Antonio Business Journal - by Allen Robertson Jr.
Every spring, as April 15 approaches, many individuals go into panic mode due to the fact that they are completely unorganized when it comes to their personal financial records. With all of the other responsibilities that everyday life entails, keeping up with personal financial papers such as receipts, tax returns, bank and credit card statements can be a challenging task. Add to that the fact that many people don’t know what is important to save and what can be thrown away, and it is easy to understand why many papers end up crammed into drawers and shoeboxes.
The truth is that personal financial information is as vital to an individual as financial statements are to a large corporation. Tax laws require the keeping of certain financial records in support of personal tax returns. As if compliance with the law isn’t enough of a reason to get organized, there is the fact that an organized financial life can actually save a person money by reducing accountant’s fees, preventing the overpaying of taxes and — if a person should ever be audited — reducing the amount of time and money wasted searching for the necessary financial documentation.
The first step in financial organization is becoming familiar with the basic documents that should be kept for a long period of time. Those items include records that relate to any substantial asset acquisition such as investments, real estate, jewelry and other things of that nature. Acquisition documents are necessary for as long as the items are in the owner’s possession and for at least seven years thereafter for several reasons:
• They show the original cost of an item if the sale is taxable;
• They may be needed for an insurance claim if the property is ever damaged or stolen; and
• Heirs may need them in the event of the death of the property owner.
The seven-year period is not a hard and fast rule; rather it has arisen out of federal tax laws relating to statutes of limitations. A couple of exceptions to the rule include retirement plan documents and tax returns. While advisers don’t always agree on how long to keep these documents, generally the recommendation is to keep retirement documents permanently. Often, it best to do the same with your tax returns, as they are full of useful information.
Tax returns are also subject to their own set of rules. The law requires that certain records be kept in support of personal tax returns and the general rule is that the records must be kept for as long as the Internal Revenue Service could subject the contents thereof to inquiry.
Most, but not all, accountants retain copies of the supporting documents for a tax return but usually for a limited period of time. That is why it is important for an individual to retain their own 1099s, broker’s statements, W-2s, letters from charities, bank notices of interest paid or received and anything else that is included in the tax return. In the view of the IRS, if there is no documented support, there is no deduction.
When collecting the supporting financial documents, it is important to understand what the IRS considers acceptable. For example, a home financial software printout is great for personal budget management, but the IRS will most likely reject it. Furthermore, the IRS often requires actual receipts — not bank or credit card statements. However, those statements should also be retained as they can serve as support in the event of an audit.
Once an individual understands what documents to keep and for how long, then comes the task of organizing the documents into an easily accessible and manageable system. The flowing tips should help even the most organizationally challenged individuals:
• Don’t throw everything out just because there is so much of it. Having to reconstruct information is very costly.
• Don’t jumble everything together. An accountant will charge you for his time to sort everything out.
• Keep each year separate. Searching for something year by year is much easier than looking through a box with 10 years worth of information in it.
• Do throw out when the time is right. If things are separated by years, the right time will be easy to determine.
• Try a computer program. It can make staying organized a breeze.
Personal finances are a business that, like other businesses, has income and disbursements that need to be followed and reported to the IRS. Keeping accurate and organized records for the required amount of time will benefit the business and the businesses bottom line.
Allen E. Robertson Jr., a certified public accountant, is the Tax Department head of Carneiro, Chumney & Co. LC, one of the largest and oldest certified public accounting firms in San Antonio.
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