Safeguarding Your Tax Records In Case of Disaster
Protect your tax records in case a natural disaster like Hurricane Sandy strikes your home.
Hurricane Sandy shows that you never know when a disaster will strike or what damage it will cause. There may be little or nothing you can do to prevent your home or office from being destroyed in a flood, fire, hurricane, or earthquake, but you can at least ensure that--no matter what happens--your tax records will be safe. This might sound like a small thing, but if your records are destroyed you'll have to go through a painstaking and time-consuming record reconstruction process.
By using digital technology it's easy to create back-up copies of your records that will be safe from almost any disaster (short of nuclear war). You can make a digital copy of any piece of paper by using a scanner and then you store it in the "cloud"--the vast system of online storage readily available to any Internet user. When you place digital records in the cloud, they will be almost impervious to disasters like Hurricane Sandy because digital copies are stored at vast data centers at multiple locations throughout the country. If a flood destroys your house and your computer (along with its hard drive), you'll still be able to access your records stored in the cloud. This is the most foolproof document back-up system ever invented.
So, which records should you store in the cloud? Here's a list.
Keep Copies of Your Tax Returns
Naturally, you should keep digital copies of your tax returns in the cloud. If you file your taxes electronically, you'll already have digital copies to store in the cloud. If your returns are on paper, you'll need to scan them. You need to keep at least three years worth of returns, since normally the IRS can audit you no more than three years after you file. However, it's better to keep at least six years of returns, because, if there is an error of 25% or more on your return, the IRS has that long to audit you. Moreover, in cases of fraud, there is be no statute of limitations. Indeed, to be on the safe side, keep digital copies of every return you've ever filed.
You also should have copies of documents that document your deductions such as bank statements, credit card statements, brokerage statements, mutual fund statements, retirement contributions, charitable contributions, mortgage payments, homeowner expenses. Many of these records are already stored online with your bank, credit card company, or broker. Make your own digital back-up copies of records that are not readily available online, such as receipts for purchases of business equipment.
Records Establishing Your Home's Tax Basis
For most people. their home is their most valuable asset. If it is damaged or destroyed in a disaster, you'll need to be able to establish the value of your home and the items in it. Make and keep digital copies of your deed, mortgage and home loan papers, and receipts for home improvements.
Photograph or videotape the contents of your home, especially items of higher value. Such photographic records can help you prove the market value of your personal property for insurance and casualty loss claims.
The IRS has a disaster loss workbook,Publication 584, which can help you compile a room-by-room list of belongings. In addition, the Insurance Information Institute has a website called knowyourstuff.org that allows you to create an inventory of your possessions and list the value of each item.