The IRS constantly issues reminders and tips on its website and social media accounts and this week the agency posted facts to help taxpayers achieve good tax planning. What is the first step to keep your taxes in order and avoid fees and penalties?
Year-round tax planning is for everyone and the agency has posted on its website important advice for taxpayers to be able to maintain their taxes in order and avoid missing deadlines and payments. What is the first step of good tax planning?
According to the IRS, an important part of year-round tax planning is recordkeeping. Gathering tax documents throughout the year and having an organized recordkeeping system can make it easier when it comes to filing a tax return or understanding a letter from the IRS.
Good records help:
• Identify sources of income. Taxpayers may receive money or property from a variety of sources and identifying them will help separate business from nonbusiness income and taxable from nontaxable income.
• Keep track of expenses. Taxpayers can use records to identify expenses for which they can claim a deduction. This will help determine whether to itemize deductions at filing and may also help them discover potentially overlooked deductions or credits.
• Prepare tax returns. Good records help taxpayers file their tax returns quickly and accurately. Throughout the year, they should add tax records to their files as they receive them to make preparing a tax return easier.
• Support items reported on tax returns. Well-organized records make it easier to prepare a tax return and help provide answers if the return is selected for examination or if the taxpayer receives an IRS notice.
Usually, the IRS suggests that taxpayers keep records for three years from the date they filed the tax return.
Taxpayers should develop a system that keeps all their important information together.
Records to keep include:
• Tax-related records: wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents, and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents that support income, a deduction, or credit reported on their tax returns.
• IRS letters, notices, and prior-year tax returns: adjustment notices when an action is taken on the taxpayer's account, Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit.
• Property records: records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.
• Business income and expenses: For business taxpayers, there's no particular method of bookkeeping they must use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
• Health insurance: records of their own and their family members' health care insurance coverage. If they're claiming the premium tax credit, they'll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums they paid.