Tax Documents and Receipts: Which Matter and Which Don’t

Last updated on January 27, 2023

Though we are constantly reminded of the importance of keeping every receipt of every expenditure and gain for tax purposes, many times we forget or grow careless. The IRS requires proof for everything you claim on your tax return. Even though it may be time consuming or difficult, there are certain documents that you must ensure you keep a copy of. Forbes speaks to the financial documents that are important to the IRS:

“First, retain a paper copy or receipt of any tax-relevant financial exchange. Scan these documents and archive them electronically, or acquire them in an electronic format. If the purchase has a manual or warranty, store all the documents in the same electronic and physical location.

“Sadly, the IRS has ruled bank or credit card records to be insufficient documentation. As a result, just keep your statements long enough to reconcile your account.

“If the purchase was a business or tax-deductible expense, record the expense and why it justifies the deduction. Store this information with or on the receipts.

“Second, keep brokerage statements indefinitely for taxable accounts. You are responsible for reporting the cost basis of any security you sell to calculate the capital gains tax. For a mutual fund with 30 years of reinvested dividends, each dividend payment is part of the cost basis. As a result, the cost basis can sometimes be computed only if you have the complete transaction history.

“Without knowing the cost basis, the IRS could argue that the entire value of the investment be treated as gain.”

It is essential to keep a copy of the tax return you file every year. You may need them not only to provide proof to the IRS, but also to other agencies. Forbes continues with the remaining two documents that you need to keep:

“Third, keep IRA non-deductible contribution records forever. You may need those records every year that you withdraw the money in retirement to show that a portion of the withdrawal is not tax deductible.

“Or to avoid the hassle, clear out non-deductible IRA contributions by converting all of your IRA accounts to Roth accounts.

“Fourth, keep partnership documents, contracts, commission or royalty structures forever. This includes property records, deeds and titles, especially those relating to intellectual property. It also includes any transfers of value for estate planning purposes.”

Even if you have never been audited by the IRS, you should ensure that you keep a copy of all relevant documents. Remember to keep all your tax documents in a safe place, as the threat of identity theft is greater during the tax season.