As a part of modernization, digital tax accounts have become the norm now. Maintaining many years’ tax forms in old cardboard boxes can be challenging. The ideal way to ensure a clutter-free office or home is to digitize tax records with the help of data conversion services. IRS recommends keeping your tax records and other related documents for at least a period of three years, and in some cases the tax documents should be kept for six or seven years if a tax payer needs to file an amended return or in case any question arises. IRS has allowed electronic record keeping of tax records since 1997.
Preparing Tax Documents
To prepare tax documents, tax professionals need four categories of information which are as follows:
- Basic data and identification: For any documentation, it is important to have identification documents for you as well as all the dependents claimed. Social security cards or any card that is issued by the government is accepted. Other basic information include address, the previous year’s tax forms, data related to a change in your tax status like inheritance, marriage or divorce or change in dependents. The IRS is taking strong action on cases of divorced spouses filing separately but claiming the same child as a dependent. Therefore, make sure that that all papers are applied correctly to avoid any rejections.
- Documents related to your income: Most of the taxable income will be summarized in the standard form of IRS sent by payers. This form is called W2 forms for traditional salaries, wages, bonuses and tips, 1099 forms for self employment, independent contracting and most investment and interest income and there is another form called K-1 forms for personal taxes that are related to ownership. Each income source should be recorded in the corresponding forms. The 1099 form has many variations that are related to specific sources. In case you are missing a form, then you can get it on IRS website. It is the tax payer’s responsibility to supply documents such as bank statements, spreadsheets and written summaries for any income that is not covered by these forms, such as rental income, alimony, and self-employment income below the $600 limit that prompts a 1099-MISC.
- Documents related to your expenses: Expenses like mortgage interest, larger charitable contribution and student loan interest etc should be documented in the 1098 form. Other potential deductions such as medical expenses, property taxes and childcare or day care costs need verification through receipts, statements, spreadsheets and cancelled checks. A professional tax preparer can find out if there is any chance of extra deduction that could help you save money on your current itemizing, but he or she should be familiar with what types of expenses you have. Ask for a checklist of potential deductions in advance so that you can find such possibilities prior to your meeting with your tax preparer. You can also get the checklist online. Work your way to find out if there are any more deductions possible and organize all your documents that are relevant. Make sure to include all documents relating to unusual or catastrophic claims like theft or losses from natural disaster. If you are able to deduct these losses under the new tax laws, then you can include any reimbursement towards all the losses while tallying your income.
- Documents related to health insurance: If you have purchased health insurance through Marketplace then you have to bring the 1095-A form that is issued by the exchange. It includes insurance premium and subsidy information for you as well as your family members. Your tax preparer may fill out other forms that apply to your situation like the Premium Tax Credit form (Form 8962) and the Health Coverage Exemption form (8965). If you are qualified for subsidies, then it is useful to have the income estimate used to calculate your tax subsidy. The tax preparer will need the estimate if your income differs greatly from the estimate and you end up with a huge subsidy repayment to defend. Under the tax Cuts and Jobs Act, the penalty for failure to acquire health insurance coverage will be eliminated in early 2019.
Providing the correct information is important for payment or refund methods. In the case of electronic payment, you will need information such as account number etc. Correct preparation of tax documents is essential and will help you pay taxes on time. It saves time as well as your money. Not paying taxes can create a negative impact on your credit score. By digitizing your tax documents you can easily store, access and retrieve any data quickly.
Advantages of Digitizing Tax Records
Benefits for Tax Payers
- Digitization helps to simplify compliance with fewer interactions with tax agency, real-time communication, personalized e-service, and simple forms
- Prevents tax errors as data is automatically entered and calculated
- Quicker refunds
- Easier access to relevant info
Benefits for Tax Administrations
- Claim more revenue and close the tax gap
- Reduce operation times
- Reduce operating cost
- Better risk management techniques and efficiency
Digital transformation of taxes helps in economic growth. In 2016, G20 leaders urged countries to consider digitization in order to update their tax systems. They said that digitization would bring changes like better managed data, pro-growth policies and tax certainty that encourage investments and trade.
The government can accomplish digital transformation in the following ways:
- A secure and scalable tax compliance infrastructure
- Capacity to process large volumes of data and draw insights from it
- Ability to automate and personalize services with the help of AI (artificial intelligence)
- Communication and collaboration platforms for Government to Government, and other interactions
- Flexible workplace with multi-channel platform
By sharing knowledge and business rules and making appropriate data available, you can hire third party vendors to integrate the tax system in the service. The solutions a data conversion company offers to digitize tax records is invaluable. Ensure that you have a good system to keep all tax records safe and secure, and easily accessible.