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RECORDKEEPINGTax 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 could lose valuable deductions by forgetting to list expenses on your return or having unsubstantiated items disallowed if you are audited. Generally, returns can be audited up to three years after filing. However, if income is underreported by 25% or more, 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, we will need less time to review your records. This may translate to lower tax preparation fees. Which records are important?
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 BusinessesThe 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 has passed. The supporting documents the IRS reviews include bank statements, cancelled checks, payroll records, invoices, and the like. You should also retain documents supporting deposits that do not reflect income, such as loan documents. If storage is a problem, consider microfilming these documents. What happens if your records are inadequate? If you fail to retain adequate records to support the items claimed on you returns, the IRS has authority to reconstruct you r 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 yours if underreported income is involved), so all records substantiating tax deductions should be kept at least that long. Here are recommended retention periods for various records:
Requirements for computer-maintained records are generally the same as for manually kept records |
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