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Record Keeping Tips

Record Keeping Brochure by the American Institute of Certified Public Accountants

Tax records should be kept year-round, not hastily assembled just for your annual tax appointment. But which records are important, and how and why do you keep them?

Without tax records, you can lose valuable deductions by forgetting to list expenses on your return or having unsubstantiated items disallowed if you’re audited.

Generally, returns can be audited up to three years after filing. However, if income is under­ reported by more than 25%, the Internal Revenue Service can collect underpaid taxes up to six years later. In other words, you need good records to verify what you report on your tax returns.

Another money-saver: If your records are organized, your accountant will need less time to review your records. This may translate to lower tax preparation fees.

Which Records Are Important?

  • Records of income received
  • Expense items, especially work-related expenses
  • Home improvements, sales, and refinances
  • Investment purchases and sales information
  • The tax basis of gifted and inherited property
  • Specific uses of loan proceeds
  • Medical expenses
  • Charitable contributions
  • Interest and taxes paid
  • Records on nondeductible IRA contributions

How should you keep your tax records? Any way that is convenient for you that will allow you to give complete information on each item: how much? what for? when? where? why?

Record Keeping For Business

The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.

 

What records? All businesses should have a permanent set of books which summarize individ­ual deposits, disbursements, and items of adjustment. These records should be retained indefinitely.

 

Permanent records also include those needed to prove the basis (cost) of depreciable assets.

 

Supporting documents may be needed to vali­date the journal entries if your returns are exam­ined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year has passed.

 

The supporting documents the IRS reviews include bank statements, cancelled or substitute checks, payroll records, invoices, and the like. You should also retain documents supporting deposits which do not reflect income, such as loan documents.

 

What happens if your records are inadequate? If you fail to retain adequate records to support the items claimed on your returns, the IRS has authority to reconstruct your income using one of several methods, including estimating increased net worth, looking at bank records, or estimating the raw materials used in manufacture.

 

Whatever method the IRS uses, you have the burden of proof if you dispute their estimate. Without adequate records, proving the IRS estimates wrong is difficult, at best. You could end up with an assessment for additional taxes, plus penalties and interest.

How Long Should Records Be Kept?

Just how long you should keep records is partly a matter of judgment and a combination of state and federal statutes of limitations. Federal returns can be audited for up to three years after filing (six years if under-reported income is involved), so all records substantiating tax deductions should be kept at least that long.

 

Here are recommended retention periods for various records:

 

  • Cancelled or substitute checks 7 years
  • Credit card receipts 7 years
  • Paid invoices 7 years
  • Bank deposit slips 7 years
  • Bank statements 7 years
  • Tax returns (generally) 7 year
  • Employment tax returns 7 years
  • Expense records 7 years
  • Financial statements Permanent
  • Contracts Permanent
  • Minutes of meetings Life of company plus 7 years
  • Corporate stock records Permanent
  • Employee records Period of employ­ment plus 7 years
  • Depreciation schedules Life of assets plus 7 years
  • Real estate records Ownership period plus 7 years
  • Journal & general ledger Life of business plus 7 years
  • Inventory records 7 years
  • Investment records Ownership period plus 7 years
  • Home purchase and improvement records Ownership period plus 7 years

Requirements for computer-maintained records are generally the same as for manually kept records.