June 24, 2013
Safeguarding Tax Records During Hurricane Season
By Rachel Margules, Senior, Tax & Business
Each year on the East Coast of the United States, an intense cycle of storms roll through the Atlantic, in a period commonly known as “Hurricane Season”. These natural disasters can occur anytime during the months of June to November when hurricane season is upon us. While memories of Hurricane Irene and Superstorm Sandy are still clear in our minds, it’s too early to know what is in store for 2013. But, if we have learned anything from the past, it’s that we need to be proactive in our emergency planning efforts and one of the most important ways we can do this is by the safeguarding of our financial assets and tax documentation.
In order to understand the importance of safeguarding tax documentation, it is important to first understand the importance of recordkeeping in general. One of the most financially beneficial things you can do is keep adequate financial records. Keeping adequate records helps to monitor the progress of your business or personal financial situation, and can be useful when it comes to important decision making. It also helps in the preparation of yearly tax returns. With adequate documentation you can identify sources of income, separate what is taxable from what isn’t, and determine which expenses are deductible. Finally, it supports the information on your tax return, should the IRS choose to conduct an audit. The IRS does not require you to keep your records in a particular way, and different systems are suited for different people or businesses. However, these records should always include a summary of business transactions or checkbook activity, and all supporting documentation that may be needed to back up these transactions.
The IRS describes three ways in which we can safeguard our tax documents and prepare ourselves for the upcoming hurricane season. First, they encourage the electronic back up of all documentation. This includes your previously filed tax returns and all supporting workpapers. If you already file tax returns electronically, save a PDF copy to an external hard drive or flash drive. Another great way to back up these files is to send yourself a copy via email, so you can remotely access it. If you manually process or paper file your tax returns, scan them in and make sure to have a copy saved in PDF form that you can back them up the same way. In addition to your previously filed tax returns, you should keep supporting documentation such as bank statements, brokerage statements, homeowner’s expenses, retirement contributions, and credit statements. Many of these records are already stored online and can be found on the website of your bank or broker. However, you can make your own digital back up of these, in addition to other records that may not readily be available online, such as receipts for equipment and other major purchases or expenses. Any back up or extra set of electronic records should be kept in a safe place separated from the originals.
Another way the IRS encourages the safeguarding of records during hurricane season is the documentation of assets, with an emphasis on higher value items. This could be as easy as taking photographs or videotapes of your home and as difficult as documenting it in list form. The IRS has released Publication 584, which is a workbook that is designed to help you determine what you have or what you’ve lost when it comes to your personal-use property. It allows you to list personal-use property from each room and determine what you have prior to a hurricane and then what you may have lost in the event of a hurricane. Another great resource can be found on the Insurance Information Institute’s website knowyourstuff.org. This site allows you to create an online inventory of your possessions and list the value of each item. When documenting your valuables online or electronically, it is important to store the list or photos outside of the home and, either send them to yourself via email or put them on an external hard drive in a safe location separate from the valuables themselves.
In addition to electronically backing up your information and documenting your valuables, it is strongly suggested that you update your emergency plan annually before each hurricane season. Each year our businesses and personal lives may change. It is important to continually update your emergency plan to correspond with these changes. Emergency plans should be reviewed each year prior the start of hurricane season and changed accordingly.
Finally, the IRS has many resources available to both prepare for a hurricane and recover from one. You can always contact the IRS and order transcripts online or request previously filed returns by filing form 4506. In addition, the IRS is constantly releasing publications that provide further information on how to report casualty losses, keep adequate records, or inquire about what tax relief is being provided for victims of natural disasters.
Living on the East Coast and experiencing hurricane season each year certainly has its risks. It is important to understand the risks associated with losing all of your financial documentation. All of the documentation you would need for insurance and recovery purposes should be easily obtainable in the aftermath of a natural disaster. Safeguarding your financial information should be part of your overall emergency plan, and you can use the tips discussed above to hope for the best but prepare for the worst.