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How to Safeguard your Records

Keeping records safe in an electronic environment is important.  Learning the best method for storing your important financial data will protect you if a disaster strikes or if you get that dreaded letter from the IRS.

As a tax preparer I have a fiduciary responsibility to keep your personal information confidential. I put in place safeguards to keep your information safe both physically and electronically. Individuals and business owners should put in place procedures to keep records available and keep them safe. Storing your records electronically is a great option. This allows you to keep copies in the office, at home and in a safe deposit box. This safeguards you from a disaster. Be sure to password protect your information. I had a client who destroyed records too soon and then was subject to an IRS audit. The backup was gone and the IRS hit this taxpayer with more tax than she would have paid if she had kept her important business records.

What should you keep? The IRS has a list of important documents to store in Publication 583 Starting a Business and Storing Records.

As you have gathered your 2008 tax records to prepare your tax return, you may wonder how far back you need to keep your documents. The IRS has issued guidelines on this area:

1. If you owe additional tax and situations (2), (3), and (4), below, do not apply to you save your records for 3 years .
2. If you do not report income that you should report and it is more than 25% of the gross income shown on the return then save records for 6 years .
3. If you file a fraudulent return there is no limit to the time your records could be up for audit.
4. If you do not file a return you put no limit to the time the IRS can ask for your records.
5. If you file a claim for credit or refund after you filed your return you must keep your records for the later of 3 years or 2 years after the tax was paid.
6. If you file a claim for a loss from worthless securities or a bad debt deduction you must retain the records for 7 years .

For most taxpayers, three years of records is enough. However, if you are self employed you should keep up to 6 years of records so that you could prove to the IRS that you reported all of your income.

As April 15th is quickly coming, now is the time to make sure you have methods in place to prepare yourselves both from disaster and have the information you need to defend your tax positions.