Invoices, bills, receipts, cancelled checks, banks statement and on and on and clutter. Business is booming and you have the heaping paper trail to prove it. Fortunately, IRS tries to keep up the evolving technology and accepts records in digital format. Maintaining documents does not have to be the space consuming hassle of the past, but record keeping and documentation is still essential to successful business management and required if you ever come under IRS audit. This does not mean keeping every document until eternity. Seriously, how import is that receipt for the fancy beeper bought in 1998? Here’s a few guidelines for deciding when to purge the file and have a bonfire.
Statute of Limitation – If the IRS audits or needs additional information on your tax return, you’re going to need to have your documents to show proof of the amounts reported on your tax return. In most cases they can’t go back forever.
- General Rule – IRS cannot go back more than 3 years to adjust your filed return. The period starts the later of the date the return was filed or the due date.
- Underreported income – If IRS has reason to believe the income on a return is understated by more than 25% they can go back 6 years.
- Loss on worthless securities/Bad Debt deduction – If you have either of these items reported on your return IRS can go back 7 years to get to it. If they are examining a return, they have the right to look at all income and deduction items, not just the ones that extend the limitations period team management tools.
- Fraud – NO LIMIT! Don’t commit fraud… but if somehow it happens, make sure you keep all your documentation for the legitimate income and expenses reported until death do you part.
- No return filed – Because the limitation is based on the date a return is filed, no return means the period cannot start. If your business receives a 1099-Misc from customers reporting your income to the IRS and your business does not file a tax return matching income for that year the IRS can file a return on your behalf. The IRS will only know your income, but won’t know your expenses. Make sure you have the documents to back up expenses when attempting to get the tax liability (which will come) reduced.
Employment Taxes – Keep all records related to employment taxes for the later of 4 years after the date the taxes were due or paid.
Assets – Keep records for an asset based on the limitations for when the asset was disposed of, not purchased. If you company bought a work van in 2005 and disposed of it in 2015, records should stay on file for 3 years after the 2015 tax return is filed in 2016.
Scan it, save it, back it up regularly, file your return on time, and don’t commit fraud. Happy filing!