The Taxman Cometh: Getting organized for your income tax filing
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…but in this world nothing can be said to be certain, except death and taxes.
- Benjamin Franklin
Once upon a time, I had an aversion to filing my income taxes. I know that might seem obvious since many Americans dislike filing their taxes. My distaste of the annual tradition came from my background where I witnessed those around me fail to understand the system, procrastinate, and then fall further and further behind.
I've noticed that a lot of my clients also put off organizing their tax paperwork until the last possible moment— some even filing for extensions, so they don't have to think about it for the time being.
But when the Taxman waits, he charges a premium.
In order to provide the most accurate advice, I've partnered with Heather Ryan, the owner of Tax Queen, a tax firm supporting entrepreneurs and digital nomads. Heather is an Enrolled Agent, which means she is authorized to practice before the IRS in any US state.
Using the strategies we detail below, you can begin to build a proactive and organized process that helps you regain control and shift your mindset around this inevitable process.
Find a professional you trust.
Yes, you can file on your own using one of many software options on the market. But, if you have a negative mindset around paperwork or taxes, finding a professional who can demystify the process and provide you a detailed to-do list is worth the money and will likely save you money in the long run.
Tip: If you tend to procrastinate, schedule a bi-annual meeting with your accountant to help you stay informed and on-track throughout the year.
Be clear on which supporting documentation you need to keep.
I've seen clients become paralyzed with uncertainty while trying to determine what they need to keep for tax time and what they can shred. Save yourself time and energy by asking a tax professional as questions arise. They will be able to provide you a checklist or income tax organizer as a guideline.
Build your tax file throughout the year.
According to Heather, the most common error she sees is clients trying to use their memory or bank records to recreate supporting tax documentation after the fact. Since the IRS accepts digital documentation, she recommends keeping digital copies of all supporting tax receipts throughout the year.
I use Evernote to scan and upload receipts on the go, and many of my clients have also had success with that process. There are several excellent electronic options like Dropbox and Google Drive, but remember to back up your files offline no matter what you use. Cloud storage is reliable and secure, but if those services lose your data, you will still be responsible for producing it in the event of a tax audit.
Did you know? Receipts printed on thermal paper are prone to completely fading within 2-7 years.
Choose consistency over perfection.
If you haven't been good at tax record-keeping in the past, choose the easiest method first—placing paper receipts and documents into a labeled file as you receive them. I prefer accordion files or file jackets over standard file folders because small and loose papers are less likely to fall out.
Once you master this process, consider transitioning to electronic record-keeping the following year.
Tip: On January 1 of each year, create a new folder—digital or paper—and keep it accessible all year so you can quickly drop in documentation and receipts as your receive them.
Accuracy > Speed
Rushing to complete your tax filing is pointless if it includes outdated or incorrect information. Before sending information to your accountant, Heather recommends making sure your records are accurate and up-to-date. Set aside some time to sort through your documents, organize them, and reflect on the past year. Consider all significant life events of the past year and complete the checklist or income tax organizer provided by your accountant.
Establish SAFE, long-term storage
Simplify your record-keeping by storing all of your tax records together. When finding a long-term storage area for your taxes, and think SAFE:
Secure - Locked away from potential thieves and prying eyes.
Accessible - Low-value storage space, but easy to access at a moment’s notice.
Fire/Flood - Off the floor and away from the garage, basement, or attic.
Electronic - Back up your documents electronically and store that hard drive in a fire/flood-proof safe.
But how long should you keep old tax files?
"Keep records for three years from the date the return was filed or two years from the date the tax was paid," Heather says. It is often suggested to keep records for seven years, just in case. It is important to remember that if you don't file returns or fraud is suspected, there is no time limit for record-keeping.
There may be circumstances where you need to keep your records beyond what is generally recommended. The IRS has provided a guideline for record-keeping on its website or you can ask your tax professional for their specific recommendation.
Do not procrastinate!
Do not start organizing the week of April 15 and expect your tax preparer to scramble to meet the deadline. Heather encourages you to reach out to your tax preparer by early February or, at the latest, March 1.
"Open the lines of communication and get a tax organizer from them."
A simple way to stay proactive is to pre-schedule tax action dates into your calendar.
January 1 - Send notice to your accountant that you would like them to prepare your filings and request an income tax organizer.
February 1 - Review the supporting tax documents you have received and compiled over the past year and compare them to the income tax organizer your accountant has provided. Check for accuracy. If anything is missing, take action accordingly.
March 1 - Send documents and a completed income tax organizer to your accountant. This will give you and your accountant 45 days to complete your returns, address any surprises, like owed taxes, and then create a plan forward.
The most important piece of advice from Heather Ryan: "Don't ignore filing taxes because you aren't organized or are afraid you'll owe. It's much worse not to file than to file and not be able to pay. The IRS accepts payment plans and will work with taxpayers to settle tax debt."
Aimee Olson of Life Done Simply is a Productivity and Organizing Coach and is a member of the National Association of Productivity & Organizing Professionals (NAPO). She specializes in Holistic Organizing and Minimalism, Residential Organizing, Workplace Productivity, and Brain-Based Conditions. She is a full-time RV entrepreneur and works with clients across the US. You can learn more about Life Done Simply at lifedonesimply.com.
Heather Ryan is the owner of Tax Queen, a tax firm supporting entrepreneurs and digital nomads. As a federally licensed Enrolled Agent, she supports her clients year-round with tax preparation, tax planning, and bookkeeping. She also educates digital nomads and entrepreneurs through articles on her website and three books— Taxes for RV Owners, 6 Steps to Starting a Business, and Finances for the RV Entrepreneur. She enjoys supporting small businesses on the road to success. You can learn more about Heather at tax-queen.com, on Facebook @ryantaxqueen, or on Pinterest @rvtaxqueen.
