Are Credit Card Statements Useful at Tax Time?

John Ulzheimer  for Credit Card Insider writes: As 2014’s W2 forms, 1099 forms, and other tax related documents find their way into our mailboxes it can only signify one thing, which is that tax season is upon us. Most taxpayers who’ve begun the process of gathering tax documents generally have two similar concerns.

First, taxpayers want their tax returns prepared so that they can receive the largest refund possible, or so they will owe the least amount possible. Second, taxpayers want to make the process of preparing their tax returns to be as simple as it can possibly be.

Deductions 101­

When a taxpayer claims an eligible deduction on his tax return the effect is a subtraction from his total taxable income for the year and, there­fore, his overall tax liability is lowered. In layman’s terms a deduction signifies that a taxpayer owes the government less money and, for many taxpayers, may be entitled to a refund or credit of any overage of taxes paid.

However, in order to properly claim a deduction on a tax return the taxpayer needs to maintain adequate proof of the deduction in case the IRS wishes to verify its eligibility in an audit at a later date.

 

Proving Deductions: Credit Card Statements VS Receipts

As mentioned above, in order to properly claim a deduction a taxpayer is required to maintain documents which support his claim (i.e. receipts, credit card statements, bank statements, canceled checks, etc.) Unsurprisingly, when tax preparation season rolls around most taxpayers would prefer to use credit card statements to prepare their tax returns instead of receipts. It’s just easier.

Credit card statements are organized, concise, streamlined, and easy to read. Conversely, it can take hours of tedious preparation to comb through a mountain of unorganized receipts in order to uncover potential deductions, and that’s assuming the taxpayer has even held on to said receipts and they are not covered in ketchup and sitting in the bottom of a trash bag at the county landfill.

Each year, when faced with the personal mountain of unorganized receipts, many taxpayers will let out a frustrated sigh and pose the question “Can I just use my credit card statements for tax preparation instead?”

The answer to this question of frustration is “both yes and no.”

Credit card statements can absolutely be used to assist with tax return preparation and, when used properly, these statements have the ability to help taxpayers save a lot of time. Yet it is also important to keep in mind that the­ IRS requires receipts to back up many deduction claims in the event of an audit.

The reason that receipts are so important to the IRS is due to the fact that while a credit card statement will demonstrate how much a taxpayer spent on a particular transaction, it will not detail what was purchased.

For example, a credit card statement might show that a $2,000 transaction was made at SAM’s Club. However, the statement would not prove that the $2,000 transaction was made to purchase computer equipment for a taxpayer’s business. From the standpoint of the IRS, the $2,000 could just have easily been spent on a new big screen TV for the taxpayer’s Super Bowl party which, unfortunately for NFL fans, is not an approved deduction.

While a credit card statement can certainly be useful to organize and manage your purchase history, only a receipt can truly defend a taxpayer’s claimed deductions in the event of an audit.

How Long Should Statements Be Kept?

Even after a tax return has been completed it is still important for taxpayers to hang onto receipts and credit card statements because the IRS can audit a taxpayer’s return for up to 3 years from the date it was filed.

However, even though the IRS may only be able to audit a taxpayer for 3 years in most cases the taxpayer will still need to keep his receipts and statements for a while longer than that. According to the FDIC, credit card statements without tax significance should be held onto for about 12 months. However, credit card statements that do have tax significance should be held onto for 7 years.