Receipts fade like memories over time. This is just one reason to digitize and keep track of tax information. The right apps and habits can save space, time, money, and hassle – but only if you use them.
“Apps should make things easier, not more complicated.” says Clare Levison, a chartered accountant in Blacksburg, Virginia. “The definition of a good app is what works for you, not what is hottest.”
Apps don’t have to be complex. For example, your phone’s camera can capture receipts and other documentation. Levison recommends moving these pictures to a specific folder in your Photos app on a regular basis so that they can be easily found later.
“You don’t want these photos mixed up with all of your other selfies and whatever.” Levison says.
You can also create folders in your email account to collect tax documents. For example, if you are an active investor, you can place your trade confirmations there (or set up a filter so that the confirmations are automatically directed there). When you buy supplies for your business online, a folder can collect receipts sent by email.
Another common tool that can be helpful, especially for people claiming business expenses or mileage, is a calendar app. These records can help document meetings with customers, business trips, and other potentially deductible events.
“The IRS auditor always asks for a copy of my calendar.” says Leonard Wright, a San Diego CPA who has been audited four times.
Calendar records should be retained for at least seven years. This is how long the IRS normally has to examine you. (However, there is no time limit if the agency suspects tax fraud, so make sure you keep enough history when choosing the electronic calendar.)
You also need to download monthly statements from your financial institutions on a regular basis, says Kelley C. Long, a CPA and personal finance specialist in Chicago.
If the IRS suspects your income is underreported, they may request bank and brokerage statements. If you’re using a credit card for business or other tax purposes, these statements can aid your deductions. While institutions are required to keep your records for several years, you may have to pay fees to access older bank statements.
Ideally, your computer and phone will already be backed up in the cloud so that you can access your data if the devices are lost, stolen, or destroyed. If not, you want to ensure that at least your tax information is regularly transferred to a secure cloud storage system or other secure off-site location.
The key is to keep information secure and accessible, which means choosing electronic instead of paper wherever possible. Paper is bulky, inefficient, and prone to all kinds of disasters, including fire and floods. Ink can fade, especially with receipts that are needed to document expenses (credit card or bank statements are usually not considered adequately documented without the accompanying receipts).
“I usually tell business owners, ‘No receipt, then no deduction'” says Bob Fay, a CPA in Canton, Ohio who is also a consumer finance education attorney with the American Institute of Certified Public Accountants. “This is a short message that sticks with you as you have so much on your plate every day.”
But by the time the IRS asks for those receipts, it might just be faint, illegible paper left if you haven’t captured a digital version, says Levison.
Paper documents can also cost you more.
“People still literally give their CPAs a shoebox” Long says. “Then what your CPA does is pay one of their interns to scan all that stuff into their systems and they’ll charge you for it.”
Sometimes special apps can be useful. You can use scanner apps to record tax documents. Some have optical character recognition that allows you to convert images into editable and searchable files.
If you own an iPhone or iPad and have your expenses listed, ItsDeductible and iDonatedIt can help you track donations to charity and find values for donations in kind such as clothing and housewares year-round. (These apps don’t have Android versions.)
Apps that create expense reports, such as Expensify or Everlance can help gig staff and other self-employed people track business costs.
Wright, the widely audited CPA, swears by apps like MileIQ, TripLog or Everlance that can be used to track mileage.
“Many of these apps are easy to maintain and allow you to track and differentiate business or personal use.” Says Wright. “They are so simple that you can do that while waiting in line at the grocery store.”
However, according to CPA Tim Todd of Lynchburg, Virginia, developing a habit of using the apps and other processes you have set up is important. Otherwise, you won’t be creating the digital paper path you need to survive an audit. Plus, you could be costing yourself money.
“By keeping records in real time, you can also make sure you don’t forget that these items are taxable.” Says Todd.
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