Receipts, like memories, tend to fade with time. That’s just one reason to digitize and track tax-related information. The right apps and habits can save space, time, money and hassle — but only if you use them.
“Apps should make things easier, not more complicated,” says Clare Levison, a certified public accountant in Blacksburg, Virginia. “The definition of a good app is what works for you, not the one that’s the trendiest.”
USE TOOLS YOU ALREADY HAVE
Apps don’t have to be elaborate. The camera on your phone, for example, can capture receipts and other documentation. Levison recommends regularly transferring those images to a designated folder in your photo app to make them easier to find later.
“You don’t want those photos mixed in with all your other selfies and whatever,” Levison says.
Similarly, you can create folders in your email account to collect tax-related documents. If you’re an active investor, for example, you can put your trade confirmations there (or set up a filter so the confirmations are routed there automatically). If you purchase supplies for your business online, a folder can collect emailed receipts.
Another commonplace tool that can be helpful, especially for anyone claiming business expenses or mileage, is a calendar app. These records can help document meetings with clients, business travel and other potentially deductible events.
“The IRS auditor always asks for a copy of my calendar,” says Leonard Wright, a San Diego CPA who’s been audited four times.
Calendar records should be kept for at least seven years, which is how long the IRS typically has to audit you. (There’s no time limit if the agency suspects tax fraud, however, so be sure your choice of electronic calendar lets you retain enough history. )
You also need to regularly download monthly statements from your financial institutions, says Kelley C. Long, a CPA and personal finance specialist in Chicago.
If the IRS suspects you’ve underreported income, it may ask for bank and brokerage statements. If you use a credit card for business or other tax-related purposes, those statements can help support your deductions. While the institutions are required to keep your records for several years, you may have to pay fees to access older statements.
BE SURE YOU’RE STORING FOR THE LONG TERM
Ideally, your computer and phone are already being backed up into the cloud so that you can access your data if the devices are lost, stolen or destroyed. If not, you want to make sure that at least your tax information is regularly transferred to a secure cloud storage system or other safe, off-site location.
The key is to keep information safe and accessible, which means choosing electronic over paper wherever possible. Paper is bulky, inefficient and vulnerable to all kinds of disasters, including fire and flood. Ink can fade, particularly on receipts needed to document expenses (credit card or bank statements typically aren’t considered enough documentation without the accompanying receipts).
“I usually tell business owners, ‘No receipt, then no deduction,’” says Bob Fay, a CPA in Canton, Ohio, who is also a consumer financial education advocate for the American Institute of Certified Public Accountants. “This is a short message that sticks with them as they have so much on their plate every day.”
But the time the IRS gets around to asking for those receipts, all you may have left is flimsy, unreadable paper if you haven’t captured a digital version, Levison says.
Also, paper documents can cost you more.
“People still give their CPAs literally a shoebox,” Long says. “What your CPA does then is pay one of their interns to scan all that stuff into their systems and they charge you for that.”
CONSIDER SPECIALIZED APPS TO MAKE IT EASY
Sometimes, specialized apps can make sense. Scanner apps can help you capture tax-related paperwork, and some have optical character recognition that allows you to turn images into editable — and searchable — files.
If you have an iPhone or iPad and itemize your expenses, ItsDeductible and iDonatedIt can help you track charitable gifts throughout the year and find values for noncash donations, such as clothes and household goods. (These apps don’t have Android versions.)
Apps that create expense reports, such as Expensify or Everlance, can help gig workers and other self-employed people track business-related costs.
Wright, the much-audited CPA, swears by apps that help track mileage, such as MileIQ, TripLog or Everlance.
“Many of these apps are easy to maintain and allow you to track and distinguish between business or personal use,” Wright says. “They’re so simple you can do that while you’re in line at the supermarket.”
But it’s crucial to develop the habit of using the apps and other processes you set up, says CPA Tim Todd of Lynchburg, Virginia. Otherwise, you’re not creating the digital paper trail you’ll need to survive an audit. Plus, you could be costing yourself money.
“Keeping records in real time can also help make sure you don’t forget those items come tax time,” Todd says.