Q: Tax-return and investment records are to be retained for three years, seven years, an indeterminate period (for example, records of an investment), or forever (false return - but who decides if you have no records?). At present, I have almost two file drawers full of paper! What is considered acceptable records? Do they have to be the original paper? I am thinking of scanning the documents into a computer and then making CDs. Will these be considered "legal" records in the eyes of the IRS and Social Security? Not only will these save space, but they would be resistant to flood and water damage.
R.R., via e-mail
A: According to an IRS spokesman, there are a number of ways that a taxpayer can meet the recordkeeping requirements to prove a deduction or other expense. Documentation can include hard copy or electronic records such as direct receipts, acknowledgment letters, credit-card receipts, and credit-card statements, that show the payment date, amount, recipient, and any other information required for the particular type of deduction (such as business purpose for a business deduction).
"Other types of records such as bank statements, check registers, and expense reports, may be acceptable to the IRS to show some of the required information," the spokesman notes. "Reliable and legible copies of documents may be acceptable in addition to originals."
IRS Revenue Procedure 97-22 provides guidance to taxpayers who maintain books and records by using an electronic-storage system that either images their hard copy (paper) books and records, or transfers their computerized books and records to an electronic storage media, such as an optical disk. Records maintained in an electronic-storage system that complies with the requirements of this procedure will constitute records "within the meaning ... of the Internal Revenue Code," he says.
For further reading, you might track down IRS Publication 552, Record Keeping for Individuals.
Q: I have read in your column that if I invest $50 a month in a mutual fund over the next 15 years the account would grow to more than $17,000 based upon an annualized return of 8 percent. Could you suggest a few specific mutual funds that could garner such returns and accept an initial investment of only $50?
S.R., Hyannis, Mass.
A: Take a look at T. Rowe Price's Balanced fund. That's a suggestion from Greg Carlson, a mutual-fund analyst in Chicago at fund-ratings firm Morningstar. He believes it would be a good choice for a beginning investor.
Through the end of February, the fund has earned a return of 8.3 percent for the past decade. Since its inception in 1939, it has done even better: 10.1 percent.
Many mutual-fund companies will require $2,500 or so just to get started. Price isn't such a stickler, but it does require that you make arrangements to pay it a minimum of $50 per month until you reach that amount. (IRA accounts mandate a $1,000 minimum, or a $50 monthly buy-in.) That's not a bad way to go, says Mr. Carlson.
"This is dollar-cost averaging," he notes. That's a technique of investing a regular amount on a regular basis in order to smooth out the ups and downs in the prices of stocks and funds.
You can reach Price at 800-225-5132. They levy a $10 annual fee for accounts under $2,000, so you'll want to build up your account sooner rather than later.