Saving Electronic Records

The world is going electronic. No big news there. We are getting more and more info digitally; newspapers, bank statements and credit card bills, books. In the tax world, we’ve seen electronic return filing and direct deposits become the norm not the exception. Pay stubs and W-2s are delivered electronically. One thing which has stayed the same is the necessity to maintain proper tax records.

While we all need to have good records, too many taxpayers have not changed their thinking, and saving, to account for electronic records. Someone who saved every paper pay stub now doesn’t even look at the electronic pay record in their online employment account until there’s a problem.

An example. The company Jane works for stops giving out pay stubs to employees. She can go online to view her pay statement if she wants. Then the company closes with little notice. By February of the following year, Jane hasn’t received her W-2 and can’t get ahold of anyone from the company. She is still required to file a tax return with that income and in previous years she could have used her saved pay stubs to get the info she needs for Form 4852- Substitute W-2. But she didn’t get pay stubs from the company and she didn’t print or electronically save the statements from online. She could go back and use the online account if she can get in. But if the company has pulled that info, she’ll have to find out another way to get that info.

Other examples:

• Banks stopped returning canceled checks on most accounts years ago but now the little copies that were part of statements are being cut on many accounts.
• We’re ordering more online but don’t think of saving a copy of the invoice we get as confirmation by email.
• Everyone seems to be pushing electronic bills and statements instead of paper ones.

It used to be that part of doing their taxes for many clients was sorting through the pile of paper they had collected through the year to document their deductions. The electronic world has cut the amount of paper but not the need for the documentation. Taxpayers need to create systems to deal with this change.

My suggestion is to phase in to the new record keeping. Start with a system to save the records you receive electronically. Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.

Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents. Electronic files need to back up regularly and there should be a copy offsite for extra security. It can be as simple as a backup on a USB drive that goes on your car key chain. Once you’re scanned your financial documents, shred or burn the originals so that someone dumpster diving doesn’t get info they need to steal you identity.

If the IRS questions the documentation for your tax return, you have the burden of proof. Blaming the bank for not giving you your cancelled checks or even the little copies won’t change the need for documentation. The best thing to do is start an electronic system now to keep the records you need should the IRS come calling.

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