What Do Brussel Sprouts and Recordkeeping Have in Common????

If there are two things that I have realized that people really hate lately, they are brussel sprouts and recordkeeping. I originally thought that broccoli might be the most hated vegetable after all of the publicity that it received from George Bush years ago. However, I recently took an informal poll, and most people volunteered that they hated brussel sprouts before I could even finish the question.



In working with many clients over the years, it appears that one of the most DETESTED parts of the tax preparation process relates to the recordkeeping. Most people hate it with a passion - if they can even figure out what to keep and what to discard. Consequently, I will be doing an ongoing series of articles on recordkeeping in an effort to ease the pain a little.

Normally, I find that if people keep the proper records, they do not end up paying any more tax than they can afford. However, when there are few or even no records, there are no accurate ways to measure the transactions. In those cases, the taxpayer normally has to report more income than is otherwise required to satisfy the IRS.

I get many questions as to how long people should keep their records. If you look over the internet and listen to some of the financial gurus, there are many "standard" answers to these questions. However, in real life, these canned answers just do not work.

A few years ago, I had a client call me to indicate he was hoping to retire in a few years. He was in the process of determining how much retirement income he would receive from the school system where he had worked for approximately 30 years. That question sounded easy enough. He should just call the school system for this information, since he had been employed there his entire adult life. It turns out that the school system had no record of his early employment because they were either not computerized early on or they had changed computer systems, and the records had become lost in the process.

I suggested that the client just pull out his W-2s from his old tax returns. I generally tell people to save all of their old tax returns, so I thought we were done. He then proceeded to tell me that a financial advisor had suggested that he could discard any tax returns over 4 years old. Needless to say, this relatively simple question became a rather long involved and drawn out process.

I often work with other clients who keep NO records whatsoever. In some cases, I have had to wait through several pay cycles just to refinance a mortgage because the clients shred their pay stubs as soon as they receive them in the mail.

In this day and age, most people are assuming that the information is readily available online. However, that is just not the case. Even though most of the banks are encouraging online paperless banking, just see what happens if you are a renter trying to buy a house. The bank often requires 12 months of rent checks copied front and back to verify the timely payment of your rent. This information is not necessarily easily accessible online. I was working with a couple last year who was buying a new house. They did not have the copies of the bank statements and canceled checks. I had to physically go to the bank myself and help the banker dig through the records to find the checks to the landlord.

A number of years ago, one of my clients was going through a nasty divorce. His ex-wife hauled him back to court in an effort to get more child support. My client was required to document EVERY penny he had spent for the last 5 years. How do you do that if you shred as you go?

I have another client who was self employed for quite a number of years as a real estate agent. She was formerly married to another real estate agent. In an effort to save on the self employment taxes in back in the 1970s, the former accountant put all of her self employment income under her husband's name (a common short-sighted tax planning strategy at the time). When she was trying to determine how much Social Security she would receive at retirement, she was surprised to learn that she had no Social Security earnings for a number of years. In this case, she needed those old tax returns from 30 years before to prove her point

Then there are many cases where records are necessary on a more routine basis. In the coming months, we will explore recordkeeping related to your principal residence. There were tax law changes over 10 years ago that impacted this area that many people still do not understand today.

One of the most misunderstood areas of recordkeeping relates to the purchase and sale of stocks and mutual funds. Many people are SUBSTANTIALLY overpaying their taxes due to recordkeeping failures in this area. Believe it or not, it is sometimes easier to handle the numerous stock transactions of some of the day traders as opposed to the single stock sale of someone who has bought and held a single stock for a substantial number of years.

Employee stock purchase plans and stock option plans are another issue in this area. You can easily be double taxed if you don't keep adequate records. Your former employer just cannot be relied upon to handle your recordkeeping. It is often hard enough to obtain these records in the current tax year. What do you think happens when there are changes in personnel or a merger of the company?

Other places where records need to be kept in detail include business receipts and rental properties. In my own family, I had to go back over 40 years to obtain information a number of years ago.

I guess that brings us to the question of, "Well, how long should I hold on to my records?" At this point, my answer is a very definitive, "It depends." I will continue to explore all of these issues in detail in upcoming blog posts. Since everyone seems to hate recordkeeping so much, I figure I am well over the limit on this discussion today!!!!!