It Can Happen
Floods. Hurricanes. Fires. Tornadoes. Blizzards. Disasters strike, and when they do they can destroy not
only a person’s home and property, but also their tax records. As I write this article, I am wrapping up a visit
with friends in San Diego who were forced to evacuate their home twice when fires threatened their immediate
area. The first things they grabbed when ordered to evacuate were the drawers from their file cabinets
that contained their insurance, banking, and tax records. After Hurricane Ike hit Galveston, Texas a few
years ago, I spoke with clients whose financial records were destroyed in the storm. When the IRS later requested
their records for audit, the clients were unable to produce them, making it difficult if not impossible
for the taxpayers to defend the deductions they’d claimed on their returns.
Personal disasters can happen as well. I’ve counseled more than one client embroiled in a nasty divorce
whose spouse deliberately destroyed important financial data. I’ve also spoken with clients who gave all their
records to a tax preparer who subsequently lost the records, passed away, or simply disappeared.
While an auditor may have some sympathy for a taxpayer who has been through these types of unpredictable
disasters, don’t count on broad leeway. Good business practices include a plan for backing up critical
documents, such as drafts of our manuscripts, and our practices should also include backing up tax data. Failure
to do so could result in deductions being denied, so it’s worth putting some time and effort into ensuring
you will have access to data should your primary records be damaged.
What should you do to protect yourself? First, never give your tax preparer your only copy of data. The
best practice is to keep the originals and give your preparer a copy. Store your original records in waterproof
containers and place them on a high shelf in a closet. If your home is flooded and your records are in a
cardboard box on the floor of your closet, the paperwork could be ruined. Avoid attics. A hurricane or tornado
can tear a roof off a home and a heavy snowfall can cause a roof to cave in. If your records are in the
attic, they are more likely to be damaged or destroyed in those types of disasters. Also, rodents sometimes
find their way into attics and might decide your receipts look like a tasty snack.
Make an extra hard copy of your records and/or scan your documentation into computer files. If you
make hard copies, be sure to store the second set of paperwork somewhere far enough from your home
that the remote storage location isn’t likely to be hit by the same disaster. For computer files, you can store
the files in the “cloud” via an online backup service, email the files to yourself as attachments that can later
be accessed from a remote computer, or store the files on a jump drive. As with paper copies, be sure you
store any jump drives in a location sufficiently far from your home that it is not likely to suffer damage from
the same incident that might affect your home. Keeping the hard copies or jump drive in a locked drawer at
your office or renting a safe deposit box is sometimes a good option. Because paperwork or a jump drive
given to a friend or family member for safekeeping could end up being misplaced, I recommend that your
offsite storage location be somewhere that is under your control.
Maintaining an updated summary of tax data throughout the year is also a good idea. Whether you use
spreadsheets, a bookkeeping program, or a manual system of logging income and expenses, maintaining a
summary of year-to-date data can be helpful if records are damaged or destroyed. I recommend updating
your summary no less than monthly. Be sure to include a copy of your most recent summary in your backup
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