1st Grade Tax Tips

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Do you endorse the "shoe box" strategy of document storage?

This is usually the time of year when people start digging through their file, or shoe box as the case may be, in an effort to get started on their dreaded Form 1040.  If you wait until the eve of tax day, then you’ll find yourself furiously rifling through said shoe box.  And if you really use a shoe box to secure your important records, then chances are you not very organized, and you have other records scattered all throughout the house or in multiple files on your computer.

I know that nobody ever taught you about income taxes or finances in grade school; my kids haven’t had that class yet either.  But as they get older, I do intend to impart some wisdom on them, even if by force.  And for now, there are many habits I can help them develop that will hopefully carry over into their adult life and will make their future April 15ths that much more bearable.

1.  “Get started on your homework right after school.”    If you at least begin the process with a few weeks to spare, then when things come up that inevitably pull you away from the task at hand, you will still have time to put out those fires and get your return filed on time.  And, if due to your personal high principles, you refuse to pay Uncle Sam a nickle before the 15th, at least have it ready to go, then you can hit “send” at 11:59pm.

2.  “Keep everything in your backpack.”    It really doesn’t matter if you’re using a shoe box for your tax docs.  A shoe box works just fine if all your stuff fits in there.  One disorganized shoe box is way better than having multiple piles around the house.  The key is to keep everything together.

3.  “Once it has been graded, throw it out.”    Sometimes we want to save a particularly well-made craft or an A+ essay, but most of the stuff that comes home from school each day goes directly into the trash.  We couldn’t possibly save everything, nor would we want to.  Same with your tax records.  If you can access it online, then why keep a paper copy?  The “three-year rule” should generally suit you just fine.

IRS Doc Requests

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image via instyle.com

If you are working with the IRS in an effort to resolve a back tax debt, chances are you will have to divulge to them some, if not most, of your financial information.  You may also be required to submit documentation to substantiate (or prove) that the information you have provided is accurate.  And it’s not just out of curiosity; the IRS requires certain documents to verify that what you have told them is correct.

The most common types of documentation have to do with proving your income and expenses.  Income is typically substantiated by submitting one or more paycheck stubs, and expenses are typically substantiated by providing bank statements, receipts, or other proof of payment.  It is also common for the IRS to require you to demonstrate the absence of something.  For example, proof that you do not have access to a 401(k) or proof that you were unable to obtain a home equity loan, etc.

If you are working with a tax attorney or other representative, they will advise you on what information will have to be provided to the IRS.  And if it must be divulged, a tax attorney has the skills to present your case in a favorable light to help you obtain the best possible deal.