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.