In general, the three-year minimum should apply for most things but you may want to hang onto everything for seven years just to be safe.
Being audited by the IRS is never a fun experience, but it can be even more painful if you don’t have access to the files and information they need. Whether you’re a sole proprietor or a large corporation, it’s crucial that you have a good understanding of how long to keep tax records on file.
If you have a large office space, there are several ways you can hang onto this important information to keep it safe in the event of an audit. Before you head to the shredder, there are some important things you need to know about holding onto your financial records.
This helpful guide explains the rules and a few suggestions for how long you should hang onto your tax records so that you’ll have everything you need if the IRS comes calling.
Why Do You Need These Records?
Once the business or fiscal year is over and you’ve filed your taxes, you might wonder why you need to hold onto all of the paperwork. According to the IRS, you are supposed to keep your records as long as needed in order to prove income or deductions.
If you had a gain or loss on a sale or you disposed of a business asset, the IRS may ask you to prove it or substantiate the cost. All records and receipts are needed in order to prove the sale of items and any profit you may have made.
For any deductibles you make, the IRS expects you to keep all receipts and have them filed by year. This includes everything from your lease to power bills and any other paperwork pertaining to a deduction.
If you’re ever caught filing a fraudulent return, the IRS requires you to keep all of your records indefinitely. However, if your business hasn’t had a problem with past filings, there are more specific guidelines you can follow.
In cases where you accidentally destroy your business records too soon, you could end up holding the bag if there’s any money owed. Without proper proof, the IRS can hold your company liable for any tax-related costs or monies due.
Keeping all of these records can cause some serious storage issues, but it’s crucial to hang onto the paperwork you need just in case. Talk with a tax attorney or CPA who can help you determine which items you should keep and which items you can destroy.
In general, the reason you need to know how long to keep tax records is so your business has pertinent information readily available if it’s needed.
How Long to Keep Tax Records, According to the IRS
When you’re thinking about how long to keep tax records for your business, it hinges on several things including the expense, action, or event that it pertains to. Ideally, everything you store should be kept if it supports proof of income, any deductions your business made, or anything else that has an impact on your return.
There is a period of limitations on your paperwork, however. This period will depend on several factors including if you need to amend a return, file for a refund or credit, or if the IRS thinks you owe additional taxes.
You should hang onto everything for a set number of years after the return is filed. Anything you file before the IRS due date is considered filed on the actual due date itself. Include your completed and filed returns with your paperwork to make it easier to reference things in the future.
Guidelines Per the IRS
Remember that the guidelines the IRS sets forth can change, but when it comes to tax records, these seem to stay the same for the most part. If you’ve filed any kind of tax return, you should keep records for at least three years.
The three-year period begins from the date you filed the original return, or it’s two years from the date you paid any taxes due. This date applies to whichever date is later if you’ve filed a claim for credit or a refund after the return was initially sent.
If your business filed a claim for a loss from worthless securities or a bad debt deduction, you should keep your records for seven years. Keep all business tax records for six years if you didn’t report income that you should have and it’s more than 25-percent of your gross income as shown on the return.
There are also some instances where you should keep your records indefinitely. This applies when you have never filed a tax return or when you’ve filed a fraudulent return.
If you have employees, keep all of their employment tax records for at least four years after the tax is paid or becomes due. This information can be kept separately from your other tax information, but it should be held onto for a minimum of four years.
How Should You Keep Your Records?
Depending on the size of your business, you could have mountains of paperwork that you need to hold onto. The IRS has set forth some detailed guidelines regarding which items you need to keep on file.
How you keep your records is entirely up to you, but it must clearly demonstrate all of your income and expenses. These records should be in regards to anything you’ve done for federal taxes and should always include a summary of any business transactions.
In most cases, the business summary will be kept in a ledger or an accounting journal and your CPA will probably have a copy, too. The books must clearly show your business gross income, deductions, and credits. A small business may use their checking account statements as proof of entries in their books.
With the onset of electronic accounting software, many companies are choosing to use this as a way to hold onto important records. This program is acceptable to the IRS as long as it shows the same information entered on the tax return.
Basically, anything that applies to written or hard copies of your accounting books will also apply to electronic records. If you’re not sure of the best method to store your information, consult with a professional accountant.
Supporting Documents to Keep on File
Depending on what type of business you have, you may choose to keep records on paper or through a cloud-based system or software. This system should include all transactions, and the IRS expects there to be some kind of supporting document kept on file, too.
Any type of sales, purchases, payroll, and other transactions should have some kind of supporting documentation. Some examples include receipts, sales slips, paid invoices, deposit slips, or canceled checks. Keep all of these documents with your accounting books or scan them and file them on a computer for future reference.
If you do a heavy volume of business, the amount of paperwork you’ll need to keep can seem overwhelming. File it by year and type of income or expense to make it easier to refer back to later if you need to.
Gross receipts should be kept, and these refer to any income you get as a result of doing business. Some examples of gross receipts documentation include cash register tapes, proof of deposits, your receipt books, invoices to customers, and any 1099-MISC forms.
Purchases and Expenses
If you have any purchases, these are the items that you buy and resell to customers, or it could pertain to anything you’ve bought for your business operations. Purchases can be anything from raw materials, to parts and the finished product that you sell.
They can also include large items like furniture for your office or new computers. Make sure you keep all canceled checks or other documents referring to the payee, the amount you paid, and any other proof of payment for all business purchases.
You can also keep cash register receipts and credit card statements as proof of purchase. Invoices are also acceptable.
Your expenses are costs that your business incurs other than direct purchases. These expenses usually relate to the cost of doing business such as your monthly electric bills, rent for the building, and even small expenses like snacks for the breakroom.
Make sure you store everything relating to purchases including all account statements and receipts. You should also hold onto any petty cash slips if there have been smaller cash payments throughout the year. Sort all of your purchases and expenses paperwork by month so it’ll be easier to refer back to later.
Be aware that if you’re deducting travel, entertainment, or transportation as an expense, you’ll need to be able to prove t to the IRS. Check the website for the current guidelines and for additional information.
The IRS will want to see proof of your current assets, especially if you claim them on your return each year for depreciation. Assets refer to any kind of furniture, machinery, or vehicles that you own and use to operate your business.
These records should be kept to prove annual depreciation and any gains or losses if you decide to sell them later. Acceptable documents for assets include a detailed list of when and how you acquired them along with the purchase price.
Other paperwork regarding business assets includes the cost of any improvements, such as upgrades to your building or business location. You should also keep records of any deductions taken for depreciation and losses incurred from a casualty such as a storm or a fire.
The IRS will also want to see any paperwork showing how you use the asset in your business. If you dispose of an asset, you will need proof of when and how you did so along with the selling price and proof of sale if the asset was sold.
Keep all proof of purchases and sales invoices, any real estate closing paperwork, and canceled checks or other documentation that identifies any payment information. You should also hold onto any proof of payment or electronic funds transfers relating to business assets.
What About Employee Records?
According to the IRS, you should keep a record of all employment taxes for at least four years after you file for the fourth quarter for the year. All of this information should be readily available if the IRS wants to review it.
Your employee information should include the company’s employee identification number and amounts and dates for all wages, pension, and annuity payments. You should also keep records of the amounts of any tips reported when applicable.
Make sure you have the name, address, and social security of every single employee on file. This information should also include their individual job titles. If you send W-2 forms to employees and they come back as undeliverable, include those with your filed paperwork.
Maintain a good record of all dates of employment and periods of time when any of your employees may have been paid while being absent due to sickness or injury. Include the amount they were paid along with weekly rates that were made by your business or a third party.
You should also keep copies of your employee’s income tax withholding forms which could be a W-4, W-4P, W-$s, or a W-4V. In general, just file away every single piece of paper that relates to your employees and their income, taxes, and other forms of compensation for four years.
Better Safe Than Sorry
Now that you know more about how long to keep tax records, it’s best to try and store everything for as long as possible.
The IRS may change their requirements, but for now, this guide will help to ensure that you’ve got everything you need in case of an audit.
If you need help with your tax filing, contact our team of expert tax attorneys today and we’ll be glad to help.