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| Thursday, November 21, 2024
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Info Center Page
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Recordkeeping
Requirements for Individuals and Businesses
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Well-organized financial records will save you time and money - not only
in taxes but also in tax preparation. |
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For Individuals
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Here's a quick rundown of suggested record keeping for individuals.
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Keep your critical records
indefinitely. Other records can safely be discarded after several years. |
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Keep tax returns (and any
records used to prepare them) at least three years after the filing date if
you have only W-2 and interest income, preferably six years if your returns
are more complex. The IRS has six years to audit you if it suspects you've
underreported income by more than 25%. |
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For investments in real
estate, keep records until at least six years after the filing date of the
return reporting the sale of that property. |
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For investments in stocks,
bonds, and mutual funds, keep year-end brokerage statements and 1099s and
toss interim statements. Retain all brokerage confirmations showing your cost
basis. (You can reduce capital gains taxes by selling specific higher-cost
shares.) |
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For your home, keep the
settlement statement and records of home improvements. These validate your
cost basis for future home sales if they are needed. |
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Some records should be
retained permanently. This applies to IRAs and pensions (Forms 1040, 8606,
5498, and 1099-R), wills, divorce decrees, and most other legal documents. |
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You don't need an
elaborate record keeping system. File tax returns separately by year, and file
investment records by broker. For expenses, even an accordion file tabbed by
category works wonders. Within a given category, use a separate envelope for
each year's receipts and canceled checks, and enclose a tape showing the
expense total. |
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For Businesses |
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What records should your business keep, and how long should you keep
them? There are several categories of records that are important to a
business, some for internal purposes and some for tax returns and other
government requirements. Let's take a look at these by category. |
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Tax records.
First, consider the records you need to substantiate your annual income tax
return. The IRS says that you must maintain adequate records, so support almost
every item of income and expense that you claim. That means you must be able
to produce receipts, invoices, canceled checks, or banking records supporting
all expense items. Similarly, you should keep sales slips, invoices, or bank
records to support all income items. |
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Accounting
records. Most businesses have adequate accounting systems to
capture routine transactions, but not for no routine transactions such as the
purchase of depreciable assets. When you buy a car, computer, or piece of
office equipment, be sure to file all purchase documents, assign an inventory
number, and immediately set up a depreciation schedule. |
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Travel and
entertainment expenses. Good record keeping for travel and
entertainment expenses is essential. Although the rules can be complex, in
general you should capture where, when, who, how much, and the
business purpose for each expense. A well-designed standard expense
report form can help insure that your records contain all the required
information. Also, if you have employees who drive on company business, make
sure they keep an auto log showing the miles driven for each trip. |
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IRS audits.
Generally, the IRS can audit a tax return for three years after the date it
was due or the date the tax was paid, whichever is later. However, if there
is a major understatement of income, they can audit for six years after the
due date (or almost seven years after the tax year). For that reason, you should
keep most income tax records for seven years.
The IRS requires records relating to employment taxes to be kept for at least
four years after the date of the return or the date the tax was paid,
although here again a seven-year rule is safer. |
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Corporate records.
Every incorporated business needs good corporate records, including documents
associated with forming the company, bylaws, business licenses, and minutes
of all board meetings. Shareholder records should include stock registers and
records of all share issuances and redemptions. Also keep copies of all
contracts and leases. Finally, don't forget current and terminated employee
files, and records of employee pension or profit sharing plans. Most
corporate and employee pension plan records should be kept indefinitely. |
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Computer recordkeeping. The IRS has established
a series of rules and recommendations concerning how electronic records must
be maintained. Generally, such records should contain the same information as
paper records and should be kept for the same length of time. |
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If you have questions about record keeping, or if
we can assist you in setting up a system that works, contact our office.
We're here to help.
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