Though the tax laws are constantly fluctuating, there is always the option to itemize deductions on your tax returns. Legitimate business expenses as well any charitable gifts and many other deductions are allowed under federal tax law. However, there is both power and peril in these deductions: if you don’t have the proper documentation to support your claims, you could be audited and penalized.
To avoid this situation, here are some of the things you need to know.
In General: What Documents to Retain
It’s a good idea to hold on to everything regarding the income and expenditure of money. This includes all your bank records, sales records, receipts, ledgers, and expense logs. If you’re making charitable donations, make sure you have documentation to support your claims. If you or your business owns real estate, make sure to retain everything related to the property—that includes records of any insurance claims, refinancing documents, as well as an improvements you may have made.
If you or your business holds securities, keep meticulous track of all the records. You should be able to produce documentation for purchases, sales, investments, divestments, broker fees, etc.
How Long You Need to Retain Them?
In general, you should hold on to most records for at least three years after you’ve filed your taxes. After that, technically, the statute of limitations for the IRS to audit you runs out. Beware, however—there are certain loopholes and exceptions in which the IRS will need records from further back. Additionally, there are some records that will you need to retain for 6 years, and some forever.
Exceptions to the Three-Year Rule
For example, if you have carryovers from certain figures from year to year, like net operating cost carrybacks, charitable deduction carryovers, or casualty losses, than the IRS suggests you hold on to these records until the deductions are no longer applicable, plus an additional seven years.
If you have any records of capital assets that you have bought or sold, you should hold on to the records for 3-6 years, depending on the property.
Also, if for any reason the IRS suspects you’ve underestimated your income by 25% or more, the statue of limitations increases to six years. If they have reason to believe you’ve committed tax fraud, or if you have not filed at all, then there is no statue of limitations for an audit.
Records to Retain for 6 Years or Longer
Though this doesn’t include everything, here’s a partial list of business records you should maintain for at least six years:
- Accident claims and reports
- Accounts payable/receivable ledgers, notes receivable ledgers, subsidiary ledgers, plant cost ledgers, and respective schedules
- Bank statements, reconciliations, cancelled checks
- Cancelled stocks & bonds
- Employment tax records
- Expired contracts, leases, option records
- Inventories
- Invoices to clients and customers
- Payroll records including pensions
- Purchase orders
- Sales records
- Time books
- Travel & Entertainment records
- All vouchers and associated schedules
Some Records Need to be Kept Forever
Some records should be considered permanent and never misplaced or destroyed. Examples include (but are not limited to) audit reports, contracts, financial statements, cash books and chart of accounts, property records, corporate documents, legal records, mortgages, tax records, and trademark and patent registrations.
For a complete list of all records to maintain, and for the proper duration, it’s best to consult with your tax professional.
Want to Know More About Keeping Records?
Every situation is different, and documentation needs vary from cases to case. . When dealing with documents and the IRS, compliance and total accountability are important. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.