Organize your documents now in case you need in the future.
You've received a letter from the IRS asking you to come in and to bring your records with you. You begin to re-create that particular year's paper trail, but it's not easy. However, by starting now and keeping your records organized, in the event of an audit you will be able to confidently walk into their office with appropriate and verifiable documentation.
Instructions
1. Start gathering information from the end of the year and begin your filing system. Choose a sturdy box to file your information in and keep it accessible. Label the box "Income Taxes" and the year filed.
2. Label one file folder "Schedule C" and the tax year. Place all your income information in here. This includes any 1099 forms you receive. This file may not contain much information until after the year has wrapped up. After you have completed your tax return, clip all of these documents to the inside back cover of your file so that they do not become lost.
3. Make folder for expenses. Label file folders with the exact categories that the IRS uses on its Form 1040, Schedule C. File labels should read "Schedule C," the name of expense and tax year. If certain categories do not pertain to your business, do not make a folder for them. If you have more than one "other expense," you should label these separately. Consult the IRS's instructions to Part V of Schedule C for information on what other expenses you can deduct.
4. Set up a list to compile information. For those who use an accounting application to do your books, go to Step 5. Otherwise, use a spreadsheet, such as MS Excel or a piece of paper to set up a list to save relevant data. Divide your list into columns and head as follows: date, brief description and amount. If you are using a spreadsheet, format accordingly. Print out pages of the spreadsheet to include in your records.
5. Assemble and file your receipts. As you record your expense information in your business books or spreadsheet/paper system, immediately file the receipt in your folders. File directly on top of the previous receipt to keep them in chronological order.
6. At the end of the year, if you have kept your filing up to date, you will have the majority of your figures collected and will only need to add up the columns. After you have completed your tax return, clip all documents to the inside back cover of your file so they are not lost. Clip all expense folders together. Place them, along with your other tax documents and your file copy of the return, in your file box. Put the box in a storage area free from moisture and dust.
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