Throughout the nation the digital age has caused many people to reduce the amount of paper used. While this is certainly good for the environment, it may leave some individuals unsure of how to organize important papers. Regardless of how it is done, it is important for individuals and businesses in the state of California to keep the records. They would most likely be helpful in a tax audit situation.

While there are multiple reasons why the Internal Revenue Service might issue an audit, the individual or business being audited has the same goal—to show that the proper rules were filed in the completion of a tax return. This can be stressful since the burden is placed on that individual or business. Making sure the documents that would be necessary in an audit situation are well organized could help to alleviate some of that stress.

Rather than paper bills in the mail, many people have opted for online versions. When available this option is a good one. Similarly, paper receipts that can be thrown away as well as other important documents which should be retained can be scanned in and their images saved on the computer and backed up in at least one other place.

For business purposes copies of cancelled checks and invoices from vendors should be held on to. Depending on the type of expense it may be deductible. Such deductions are limited to “ordinary and necessary” items.

Individuals facing an audit will be happy to have receipts available for the items deducted. These receipts may be for things such as business income, and entertainment or meals. Receipts should also be obtained for charitable donations.

Of course even when many of the documents necessary in a tax audit are available in electronic form, the paper documents can still grow and take up a lot of space. Fortunately many documents do not need to be held onto forever. In situations where a resident of California does not amend his or her tax return, five years should be sufficient.

Source: The Orange County Register, “Keep thorough records, even in the digital age,” Patrick Harper, July 30, 2014

 

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