Do I Need to Save Receipts for Taxes?

Keeping accurate records, including receipts, is a fundamental aspect of managing personal finances and fulfilling tax obligations. These records serve as the primary evidence for income, deductions, and credits reported on a tax return. Maintaining thorough documentation helps ensure compliance with tax laws and can be invaluable if a tax return is ever reviewed or audited.

When Receipts Are Required

Receipts are required to substantiate any transaction affecting taxable income, deductions, or credits, as the Internal Revenue Service (IRS) places the burden of proof on taxpayers to support claims made on their tax returns. Without proper documentation, the IRS may disallow deductions, potentially leading to additional taxes, penalties, and interest. This requirement extends to various financial activities, from business expenses to charitable contributions.

Specific Expenses Requiring Detailed Documentation

Certain categories of expenses require detailed documentation. Business expenses, including travel, meals, and office supplies, demand precise records. For business travel, documentation should include the amount, time, place, and business purpose. For business meals, the record should detail the cost, date, location, business reason, and the business relationship of those present.

Medical expenses require receipts for itemized deductions. These records should show the cost of medical care, including payments for equipment, supplies, and diagnostic services. For charitable contributions, especially cash donations of $250 or more, a written acknowledgment from the charity is required, stating the amount and whether any goods or services were provided in return. For non-cash donations, records should include the date, location, description of the property, and its fair market value.

How Long to Retain Records

The period for retaining tax records depends on the transaction and the applicable statute of limitations. For most tax returns, the IRS recommends keeping records for three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. This three-year period aligns with the timeframe the IRS has to audit a return and assess additional taxes.

There are exceptions to this rule. If there is substantial underreporting of income, more than 25% of the gross income shown on the return, the retention period extends to six years. Records for property, such as those used for depreciation or gain/loss on sale, should be kept until the limitation period expires for the tax year the property is disposed of. Records for worthless securities or bad debt deductions should be kept for seven years. Employment tax records must be retained for at least four years after the tax was due or paid.

Acceptable Formats for Records

Taxpayers have flexibility in how they maintain their records, as both paper and electronic formats are acceptable to the IRS. For electronic records, scanned images, digital receipts, and photographs are valid forms of documentation. Electronic records must be legible, accessible, and maintained with adequate backup to ensure information can be easily retrieved and verified.

When storing records electronically, taxpayers should ensure the system clearly shows income and expenses. The IRS accepts various common file types for scanned or photographed images, such as TIFF, JPG, JPEG, and PDF. The ability to produce these records accurately and promptly is important.

Strategies for Missing Documentation

If original receipts are lost or never obtained, other forms of documentation may still be used to substantiate expenses. Bank statements, credit card statements, and canceled checks can serve as corroborating evidence by showing transaction dates, amounts, and vendors. For certain business expenses, other records like calendar logs, mileage records, or emails can help reconstruct transaction details.

The “Cohan rule” allows taxpayers to estimate certain business expenses even without receipts, provided the expenses are reasonable and credible. This rule does not eliminate the need for any proof; rather, it allows for estimation when direct documentary evidence is lacking. While receipts are preferred for substantiation, reconstructing records using alternative evidence can be crucial during a tax audit.