Record Keeping Requirements from the IRS

tax records lengthWe are often asked this question ”How long should I keep records for the IRS?

The information we are about to provide you is accurate as of 04-25-2017 and primarily focuses on documentation for Income Tax Returns. Understand that the IRS may change its requirements at any time and without notice so we invite you to also check this link for up-to-date information.

How long should you keep records?

In general, the IRS requires taxpayers to keep records for 3 years from the date the original tax return is filed or 2 years from the date the tax due was paid (whichever is the latest date). By records, we mean any documentation that can support expenses, deductions, credits, income (wages and others), and events that may have affected your return. Click here to see an extended list of record types.

At Kenyon & Associates, we recommend that you also keep your actual tax returns forever. In addition, though a record connected to a property expires in the year in which you dispose of the property, you should try to keep these documents for as long as you can. We might be able to use them to calculate amortization, depletion, or deprecation. The same is true for other documents. The IRS may no longer require you to keep them but they may have other use.

The IRS has what it calls a “Period of limitations”. It is the period during which the IRS can audit your returns (generally to re-assess your tax claim and increase your amount due) or you can amend your return (generally to claim additional credits or increase your previous refund).

As noted by the IRS on their website “Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.”

Income tax returns' period of limitations

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
2. 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 if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.
7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

What type of records you should keep?

The answer to this question varies if the records are for your personal return or for business purposes.

Personal Tax Return Documents

You should keep all records that can justify a deduction, a credit, an income, amortization or depreciation, etc. In all, any documents that were needed to file your return should be kept.

  1. W2 forms showing your wages.
  2. Real estate documentation included but not limited to real estate tax forms and purchase.
  3. Receipts of donations made either in cash or in-kind to qualified non-profit organizations.
  4. Marital status change: Separation, divorce, or marriage.
  5. New dependent: A children born or adopted, or other dependent(s) for whom you are responsible.
  6. Documents showing other forms of income received.
  7. The rental income you may be receiving.
  8. Etc.

Business Tax Return Documents

  1. Sales slips
  2. Paid bills and invoices
  3. Expense receipts
  4. Bank deposit slips
  5. Canceled checks
  6. Income-related documents: Cash register tapes (if you have a retail store), sales slips, bank deposit slips (for both cash and credit card sales), receipt books (if you use them), all invoices, and forms 1099-MISC.
  7. Purchases related documents: Receipts for products you buy for resell to clients, canceled checks or other paperwork that identify payee, amount, and proof of payment/electronic funds transferred, cash register tape receipts from the entity you bought from, credit card receipts and statements showing your purchases, and invoices you have received and paid.
  8. Expenses related documents: Any documentation that are actual costs you incur (other than purchases) to run your business, canceled checks, amount, and proof of payment/electronic funds transferred, cash register tapes, account statements, credit card receipts and statements, invoices, petty cash slips for small cash payments, payments for assets that are property of the business like equipment.

In addition, we want to highlight the following three areas which can be confusing.

Employment Taxes - The IRS requires that you keep all records of employment taxes for at least four years after filing the 4th quarter for the year.

  1. Your employer identification number.
  2. Amounts and dates of all wage, annuity, and pension payments.
  3. Amounts of tips reported.
  4. The fair market value of in-kind wages paid.
  5. Names, addresses, social security numbers, and occupations of employees and recipients.
  6. Any employee copies of Form W-2 that were returned to you as undeliverable.
  7. Dates of employment.
  8. Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
  9. Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
  10. Dates and amounts of tax deposits you made.
  11. Copies of returns filed.
  12. Records of allocated tips.
  13. Records of fringe benefits provided, including substantiation.

 

Publication 463, Travel, Entertainment, Gift, and Car Expenses - The IRS keeps a close eye on such expenses so make sure to review their updated requirements at this link. Make sure you can prove every expense and deductions you file and that relate to travel or entertainment. The staff of Kenyon & Associates will discuss such expenses with you during your meeting.

 

Employment Tax Record-Keeping - All records of employment for your paid staff and subcontractors have to be kept for at least four years. Visit these two links for additional information on the latest IRS requirements:

More on Employment Record Keeping »
Publication 15, Circular E Employers Tax Guide »

 

If you have any concerns regarding retaining/disregarding a specific form, contact us at 707-202-4220.