Document Retention | robergtaxsolutions.com

Photo by xeeliz at Flickr.com

What Documentation Do I Need To Support My Tax Return?

I recently got an e—mail from my friend Steve who was concerned that he was keeping his records for too long. He was looking to purge some of his files and he also wanted to know if he was overdoing it on his documentation. Steve owns a small business. This is part 2 of a series—http://robergtaxsolutions.com/2013/11/does-this-make-my-files-look-fat/.

In my last post I talked about the IRS rules for record keeping. The problem I find with the IRS post is they tell you to keep records for your tax returns, but they don’t tell you what records to keep. I’m going to go over those here. Part of my job as an Enrolled Agent is to assist people who are getting audited. So, based upon my audit experience I think you should keep the records that the IRS will ask for in the event of an audit.

Bank Statements—if you own a small business, you should have a separate bank account for the business. In an audit, the IRS will always ask for copies of the bank statements.

Deposit tickets—Granted, your deposits should all be reflected on your bank statement, but they always ask to see those so hang onto them as well.

Receipts for expenses— always good to have.

Mileage logs—if you claim mileage you should have a log. Hold onto these—they are like gold.

Your QuickBooks or other accounting software records.

Now for space purposes—you can have all of these things scanned and saved on disc or on the cloud. I like to keep the paper around for at least three years, but after that, as long as you can access the scanned documents you should be good.

Here’s the funny thing—the better you are at keeping records, the more stuff you can throw away. Counterintuitive, right? Let me explain, let’s say you use QuickBooks, and you purchase a few cases of paper and other stuff from your local office supply company. They deliver the paper and goods and send you a bill. You write them a check and log into QuickBooks something like Check #1241 to Office Supply Solutions for $162.47 paid on October 31, 2013 from Bank of America checking account and expensed as office supplies. It’s all right there in your QuickBooks transaction.

Now, for the three years, I would still hang on to the Office Supply Solutions receipt, I’d keep my bank statement, and my checking account register. But after five years, I’d let those receipts find their way to the shredder. (Yes, the IRS says three, but I’m paranoid.)

If your records are good, you don’t need to hang on to stuff for as long because you documented everything and it will tie to your bank statement. Three years from now when you’re getting audited, you’ll have no clue what check number 1241 was for—you don’t have to, it’s in your QuickBooks.

But if your records are bad—that’s when you really need them. Let me explain—

Let’s say I don’t use accounting software, I don’t maintain a separate bank account for my business, and I don’t keep a ledger of my expenses. One day the IRS decides that I’ve over claimed my expenses (meaning that my income is actually higher.) Remember my last post? If the IRS believes that you underreported your income by 25% or more, the statute of limitations on an audit is 6 years instead of three. (If they think it’s fraud, it’s open season on your forever.)

Well, the person with good records still has his QuickBooks account and matching bank statements. Everything ties. Easy audit—in, out and outta there.

The person with the bad records is going to have to dig and find that office supply receipt, find cancelled checks (who still get cancelled checks anyway?) or somehow prove the expense. Can you pick up a random bank statement from three years ago and look at a check number without copies of the cancelled checks and tell what that check was written for? Even if you can, the IRS auditor isn’t going to believe you without a receipt to back it up.

So keep good records now, so you can thin out your files later.

Photo by Julep67 at Flickr.com

Can You Have Too Much Documentation?

I recently got an e-mail from my friend Steve who was concerned that he was keeping his records for too long. He was looking to purge some of his files and he also wanted to know if he was overdoing it on his documentation. Steve owns a small business.

Personally, as an accountant, when Steve told me about his recordkeeping–I was just so excited! He kept such good books. But at what point do you not need all those records?

I’m posting what the IRS says on its official website in red. My comments are in black.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return. I would also add that you should keep the official tax documents that go with the return, especially things like 1099s and W2s if you are an employee. Keep anything that shows a tax payment.

According to the IRS, your need to hang onto records depends upon your situation. The situations are as follows:

You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years. What they mean is that if you don’t have any tax problems, you only need to hold on to your tax returns for three years. That’s how long the IRS has to go after you for a simple mistake like leaving an interest statement off your return. So here’s my issue with this–what if you don’t know you have a tax problem? Like what comes next—

You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years. Bingo! This is why I don’t approve of tossing documents after only three years. Here’s a good example–let’s say you’re a senior citizen with some social security, a pension, and some stocks. You sell $10,000 worth of your mutual fund for your living expenses but you had a loss so you don’t think to even put it on your tax return. (That’s a very common mistake.) So even though the missing item on your tax return was a loss, to the IRS, its $10,000 and hit’s the over 25% mark.

You file a fraudulent return; keep records indefinitely. Okay, so if you’re filing fraudulent returns, keep your records forever. Ahem…people who intentionally file fraudulent returns–well that’s just not my specialty. But normal people who screw up their returns–that is. The IRS has a hard time telling the difference between criminals and good people who do stupid things.

You do not file a return; keep records indefinitely. Okay, I say file a tax return every year whether you are required to or not. It helps protect you from identity theft and it protects you from the IRS coming after you to taxes later because you missed a document.

You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. That means if you filed an amended return to get back more money, hold on to your records for even longer.

You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years. That makes sense.

Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later. The IRS is very touchy about employment taxes. These are really important.

Of course, records relating to assets that you own should be kept for at least as long as the asset is in the business. For example: You buy a computer and you’re depreciating it for 5 years. You must keep the receipt for that for the whole five years. You buy a business building–you hang onto that document for the whole 39 years or until you sell the building.

So here’s my “Jan Rule” on keeping tax records. If you own a small business, keep your actual tax returns and back up for at least 10 years. In my next post, we’ll talk about what back up you’re going to want to keep.

Category: Document Retention

Does This Make My Files Look Fat (Part 2)?

Does This Make My Files Look Fat?