Proper documentation is essential to staying compliant with the Internal Revenue Service (IRS) and maximizing tax returns for individuals, businesses, and non-profit organizations. Use the tips in this blog to create your best practices for keeping accurate records to help you stay out of audits and maximize your profits.
Keep Your Signed Tax Returns
One of the most important aspects of keeping proper documentation is ensuring the retention of records necessary when filing taxes. For example, copies of signed tax returns should be kept for at least seven years to be consulted if necessary, whether for reference or tax-related issues. Also, you should keep copies of your W2 and 1099 forms in a secure location to prevent them from being lost or stolen, preferably in a safe.
Keep All of Your Receipts
Another crucial piece of documentation for individuals and businesses to keep is original receipts. These receipts should be organized, such as by date or category, so that they can be easily accessed. In addition, you should keep copies of checks and bank statements for reference purposes. There are small and portable copier/scanner machines explicitly made for the purpose of keeping receipts. They are easy to use and very efficient in helping you organize your receipts, particularly if you have many.
Track Your Mileage
Tracking mileage is crucial for documenting expenses for small businesses, freelancers, and self-employed individuals. Accurate mileage logs not only help in substantiating expenses but also help in calculating tax deductions for business-related travel. Therefore, it is essential to keep a detailed mileage log that includes the following information:
- Date of the trip
- Starting and ending odometer readings
- Destination
- Purpose of the trip
Business owners must keep track of both personal and professional mileage to separate and adequately document business expenses. Taxpayers can only deduct the expenses related to business travel, so the mileage log should clearly identify which trips were for business purposes.
Inaccurate or incomplete mileage logs can lead to incorrect tax deductions and trigger an audit from the IRS. In such scenarios, taxpayers may have to pay additional taxes, penalties, and interest. Therefore, maintaining an accurate and detailed mileage log can prevent costly mistakes and give business owners peace of mind.
Furthermore, accurate mileage logs may provide additional tax deductions beyond just the mileage rates. For example, suppose the taxpayer incurred parking fees, tolls, or other expenses on a business trip. In that case, these expenses can be included in the expense report along with the mileage rates to boost the total tax deduction. It is crucial to maintain proper documentation for any expenses beyond the mileage rates claimed in tax filings.
Keeping an accurate and detailed mileage log is essential for claiming tax deductions on business travel-related expenses while staying compliant with IRS rules and regulations. A well-maintained mileage log can give taxpayers peace of mind, prevent audits, and help maximize tax returns while avoiding penalties, interest, and incorrect tax filing.
Keep Copies of Contracts and Invoices
You should keep all copies of contracts and billing invoices. These documents provide proof of services rendered and payments received and serve as significant evidence of transactions that have taken place. Also, those documents should be readily available in the event that a legal matter arises to provide proof of payment and verification of the terms of your agreement.
Proper documentation is the backbone of any individual or business’s financial management, whether for tax purposes or to better understand cash flows and expenses. Keeping accurate records is critical for avoiding audits and finding deductions to maximize returns. Proper documentation helps provide the accuracy, accountability, and transparency needed for financial management, maximizing profits, and minimizing risk. By following these guidelines, individuals and businesses can help prevent financial errors, stay compliant with tax laws, and reduce the risk of errors or omissions that could lead to an audit.
Other Benefits
While proper record-keeping is crucial for tax compliance and avoiding penalties, there are additional benefits to keeping detailed records that can help businesses thrive. First, maintaining accurate financial records allows business owners to track their performance and make informed financial decisions. By regularly reviewing their financial statements and monitoring their cash flow, business owners can identify areas for improvement, plan for growth, and assess the financial health of their business.
Furthermore, accurate records can help business owners take advantage of potential opportunities for growth and expansion. Detailed financial records can provide a comprehensive overview of a business’s strengths and weaknesses, highlighting areas for improvement or investment. This information can be used to develop strategies to increase revenue, expand into new markets, or invest in new product lines.
In addition to financial benefits, other advantages of proper record-keeping include helping to build investor confidence and securing financing for business expansion. Financial institutions, investors, and other stakeholders often require detailed records to validate a business’s financial position and performance before committing funds or making investment decisions.
While proper record-keeping is essential for tax compliance, businesses that maintain detailed and accurate financial records avoid penalties, improve financial management and decision-making, identify opportunities for growth and expansion, and build investor confidence. By prioritizing record-keeping, businesses can secure their economic viability and create opportunities for long-term success and growth.
JoAnna Laiscell, October 3, 2023
