As experienced tax preparers, we often notice that some taxpayers have a hard time gathering and arranging the necessary documents, such as: invoices, receipts, bills, etc., and sometimes even missing items such as copies of previous years’ tax returns, regardless of whether they are individual or corporate tax filers. This often complicates the tax filing process and increases the tax-return preparation time. However, proper record keeping can help avoid these complications.

Here is a brief overview of the necessary measures that taxpayers can take when it comes to maintaining records for their tax returns.

Tax Recordkeeping

 

Why a Taxpayer Needs To Maintain Their Tax Records

It is very important for taxpayers to maintain copies of their completed and filed tax returns. It helps in preparing future tax returns, in verifying amounts in case of an amended tax return, and also if an individual switches their tax preparer as it proves useful to the new professional in preparing the return.

Generally, a taxpayer needs to keep records supporting income, deduction, and credits shown on the tax return until the period of limitations (i.e. period within which a filed tax return can be amended) for that tax return runs out. To be on the safe side, it is good practice to maintain all tax-related documents for a minimum of 6 years after the filing deadline (including extensions).

 

What Records Need To Be Maintained

Taxpayers should always keep good records of the following items:

  1. Income Sources: All physical slips and other documents (invoices) showing income received should be kept together such as: income from retirement accounts, pension, sale of a property and income from investments. In addition, we recommend that any income received should be maintained in a report or spreadsheet.
  2. Expenses: Business owners and employees with home offices or other premises should maintain proper records of all expenses. Make sure that any purchases, payroll, and other expense transactions you have in your business generate some type of supporting documents or reports. These documents contain information you need to record in your books.
  3. Documents Required to Support Tax Claims (Credits & Deductions): The responsibility to substantiate entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove certain elements of expenses to deduct them.Education related expenses, or expenses incurred on children, and certain other expenses such as travelling to an office qualify as tax deductions but only if proper documents are maintained to substantiate such expenses. Therefore, proper documents should be kept to support such claims while filing tax returns.

 

Types of Records That Need To Be Maintained

For the above purposes the following documents qualify as acceptable documents by the tax authorities such as: IRS and CRA.

  • Cheque book details, cash register tapes, cash and credit sales details, receipt books, invoices, sales slips.
  • Canceled cheques or other documents that identify payee, amount, and proof of payment/electronic funds transferred, petty cash slips for small cash payments.
  • Employer identification number (EIN) copy.
  • Record of amounts and dates of wages, annuities, and/or pension payments.
  • Record of tips; if any.
  • Record of names, addresses, social security numbers, occupations of employees and recipients and dates of their employment.
  • Record of employee, copies of Form W-2 and/or T4 (for Canadians).
  • Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
  • Record of dates and amounts of tax deposits made, and copies of returns filed, and fringe benefits provided, including substantiation.

 

Records can be maintained physically in paper form as bill slips, accounting books and/or electronically as excel files, PDF copies of bills, electronic receipts, or invoices.  Anything you feel is relevant should be kept on file as it may assist in preparing the original or amended tax returns.  If you are not sure if it is relevant please ask your tax advisor.

Furthermore, taxpayers should keep in mind that the record-keeping period is different from statute of limitation period for tax purpose. The ‘statute of limitation’ period applies to the time period within which the IRS can audit a taxpayer which can extend to 10 years.

Therefore, taxpayers with certain highly complex tax scenarios should consider the ‘statute of limitation’ period as their record-keeping period to avoid any tax issues in the future. (Learn more about the IRS Statute of Limitations)

AG Tax LLP Can Help

If you have any other tax-related queries or need assistance with tax planning or filing you may still contact AG Tax. Our tax professionals are highly-experienced with US and Canadian tax laws and can provide you the right guidance to handle your tax situation.

Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to US, Canada and other international tax laws.

We can assist with:

  • Canadian Personal and Corporate tax returns
  • Cross Border Taxation and Business Planning
  • US Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

  • 416-238-5920 (Greater Toronto Area, ON)
  • 604-538-8735 (Greater Vancouver Area, BC)
  • 780-702-2732 (Greater Edmonton Area, AB)

 

Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.