Good record-keeping will help keep you on right side of tax man

Are you getting an income tax refund? OK, maybe this is jumping the gun a bit, but many taxpayers, particularly those who have income taxes withheld from their wages and who itemize deductions , are fairly certain they will be getting a refund check from Uncle Sam - perhaps as early as February of next year.

If you believe you are one of these, now is the time to get your records together. Then, as soon as you receive your W-2 statement from your employer, you can sit down and prepare your return, get it in the mail, and wait for the check, which will come faster if you file early.

Another incentive for good record-keeping came from Congress this year. The Deficit Reduction Act of 1984 outlines some tough penalties for taking deductions that you can't substantiate with receipts or an up-to-date log of expenses, like auto mileage. If you claim a deduction that is not backed up, you could be hit with a 5 percent negligence penalty. These penalties apply to returns or deductions associated with the 1985 tax year and after, but that gives you time now to build up a good record-keeping system.

Some records have to be kept almost forever: records on a home sale, records of home improvement that would back up a tax claim when a house was reappraised or sold, documents relating to the purchase or sale of securities, collectible items or artworks, and at least a copy of all your old returns so you can keep track of your financial situation over the years.

Other records need to be kept for only a limited period. Complete records to back up income tax deductions, for instance, need to be kept three years, the amount of time you're usually subject to an audit. The three-year time frame generally applies to records for health expenses, home office deductions, business travel, receipts for investment advice, and subscription forms for business publications you need to help with investments. Of course, if the Internal Revenue Service suspects fraud, there is no time limit: The IRS can investigate fraud for several years past the three-year deadline.

If you don't have any, perhaps this is the time to go out and buy some of those multi-pocket accordion folders that tie up with a string or elastic cord. You can use these folders to set up monthly record-keeping systems, to file sales receipts, your copies of bills, and your own logs of expenditures where there are no receipts. As for those those flimsy little charge receipts from gas stations and department stores, you need to keep them only until the next month's bill comes. Once the bill arrives and you make sure the slips agree with the statement, the tissues can be tossed out.

If you itemize deductions and have some outstanding charges, be particularly sure to save copies of monthly bills that come early in the new year. These statements usually show how much (deductible) interest you were charged in the previous year.

If receipts or bills are not available, you'll have to keep your own records. If you do any driving for a charitable organization, for example, keep a little notebook or pocket calendar where you list where you went and how many miles you drove each day.

Keeping good records is not very effective if they're scattered all over the house and you and the members of your family don't know where they are. For very valuable documents, like birth certificates, marriage certificates, titles, and deeds, a safe deposit box is probably best. Be careful about life insurance records and wills, though, because some states automatically order safe deposit boxes sealed upon the death of the owner. While you're out shopping for those accordion folders, look for a fireproof box for insurance papers, wills, and other valuable documents.

For other documents, receipts, bonds, warranties, safe deposit keys, and bank books, make a list of where they are kept and put a copy of the list in the fireproof box, taped on the inside of a cupboard door, or somewhere else that's easy for you to remember. Put a second list somewhere else. Then tell everyone in your family who needs to know about the documents where they and the lists are.

If you are one of those people with their own highly personalized record-keeping ''system,'' try to explain this to these same family members, too.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.