Not Keeping Good Records
The IRS is an oddly trusting institution. Filing a tax return is "voluntary," meaning that every taxpayer is responsible for filling out the right forms, and accurately and honestly reporting all income, expenses, deductions and exemptions. If you're lucky, that's the end of it. But if you're one of the roughly 1.5 million Americans who receives an IRS audit each year, it's only the beginning [source: McCoy].
When you file a tax return, the IRS doesn't ask you to staple receipts, bank statements or other paperwork to the back of the return. It's tempting, then, to think that you should feed these documents to the shredder. Bad idea!
True, the odds are in your favor that you will never have to show those investment account statements and Lowe's receipts to anyone. But if you are unlucky enough to trigger a red flag with the IRS computer, you will need to back up every number with a piece of paper.
- W-2 and 1099 income statements
- Confirmation from IRS that you filed your tax return
- Medical bills
- Receipts for charitable donations
- Receipts for improvements and expenses related to rental property
- Investment account statements
- If you own your own business: business expenses, employee wage statements (W-2s and 1099s), all payroll taxes paid (FICA and FUTA), etc. Businesses should save documents for at least four years.