It really does pay to get organized. Here's a guide to record-keeping and a simple system to make it all manageable.

Good record-keeping is a must for everyone. It can help you track the success of investments or settle disputes with merchants. It can lower your taxes by reminding you of deductible expenses you may otherwise forget, and it can protect your deductions in an audit. The best records indicate who you paid, when you paid them, how much you paid and what type of expense was involved.

The Internal Revenue Service operates under the basic premise of "no substantiation, no deduction." Tax savings are not the only reasons to keep records. Good records will help you:

• Identify sources of income to separate business from non-business income and taxable from non-taxable income.
  
• Keep track of expenses that you might otherwise forget to deduct.
  
• Keep track of the basis, or original value, of property. When property is sold for a gain, taxes may be due on the profits. By keeping track of the cost of the property, and any improvements, you reduce your potential tax. The analysis is the same with mutual funds that you sell. Remember, the basis on mutual funds includes not only what you paid for them, but any reinvested dividends and capital gains.
  
• Prepare your tax return. Good records are the basis of any accurate tax return. You can use extensive accounting programs and systems, but I recommend most of my clients use what I call the "envelope system."

Under this system, whenever you purchase something that might be deductible, get a receipt. Throw all of your receipts in a drawer or a single file. Once a month, when you are reconciling your checking account, separate the receipts into individual envelopes for each category of tax deduction you expect to have. For example, you will have an envelope for charitable contributions and another for medical expenses. At the end of the year, add the receipts and checks for each category, and put your total on the outside of the envelope. That's the number you give to your accountant for your tax return.

The period of time you have to keep records is a function of the period of limitations for the items you are claiming. The period of limitations is the time frame in which you can amend your return or the IRS can assess additional taxes. Once the period of limitations has expired, the IRS lacks the statutory power to challenge your return.

The following table details the typical length of time you must keep certain records. "Years" refers to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.

Tax item	Time
Previous tax returns	3 years (Some authorities advise keeping them for six years, since in some cases where income has not been reported, the IRS may go back as far as six years to question a tax return.)
Income that was not reported that accounts for more than 25% of the gross income on your return	6 years
A fraudulent return	No limit
A return that was not filed	No limit
A claim for credit or refund filed after you've already filed a return	Either 3 years after filing or 2 years after tax was paid, whichever is longer.
A claim for loss from worthless securities	7 years
Canceled checks	1 year for all checks and 7 years for ones that may be needed as verification to IRS
When to Through Out --- What	Here is a suggested retention plan to comply with year 2008 regulations.

Some records you may want to keep forever. Remember that the chart above is based on when the item appears on your tax return. Many items might not appear on your tax return until years after the expenditure. For example, mutual funds you buy today might not be sold until 10 years later. You need the cost basis of today's acquisition, therefore, for at least 13 years (three years after it appears on your return). In another example, records of home improvements should be kept at least until the home is sold, and for three years after that to establish gain or loss.

It's up to you to prove your deductions. The records you keep can meet this burden of proof. You should keep invoices, receipts, canceled checks and any bank, brokerage and mutual fund statements, as well as any W-2 or Form 1099s you receive. A check alone, as proof of payment, may not always be sufficient to deduct the item. You also must prove that the item was allowable under the law, not just that it was paid.

For example, if I have a check to John Smith for computer repair, how does the IRS know just by looking at the check who John Smith is or what he does? An invoice, preferably on business letterhead, would answer any relevant questions. Under the law, contributions of $250 or more normally are deductible only if you have a written acknowledgment of your donation from the charitable organization.