You never know when the IRS will knock on your door for an audit, making it crucial to have your tax records ready at all times.
In this article:
- Copies of Paper Returns
- Copies of Electronic Returns
- Business Income Receipts
- Documents Pertaining to Assets/Property
- Investment Income
- Purchase Documents
- Operating Cost Receipts
- Miscellaneous Expenses
- Employment Taxes Documents
9 Tax Records That Should Always Be at Your Disposal
1. Copies of Paper Returns
Keep printed copies of your tax returns for at least the past three years. This is because the IRS can flag a taxpayer for an audit even three years past the deadline of a tax return.
However, there are times when the IRS waives this three-year limit. The agency can audit returns from way beyond this three-year period, so long as the timeframe is within the U.S tax laws’ statute of limitations.
That said, it is ideal to keep copies of your tax returns for as long as it’s logistically possible. Also, make sure to have a copy of your proof of filing.
For paper returns, a certified receipt from your chosen private courier should also be kept.
2. Copies of Electronic Returns
The IRS allows electronic filing of tax returns. This system seeks to provide ease to tech-savvy taxpayers.
There are several e-filing portals accredited by the IRS. These providers have passed the agency’s Assurance Testing System (ATS).
It is up to taxpayers to communicate with these providers so as to ascertain which software will best suit their filing needs. And, as with paper returns, it is crucial that documents from e-filed returns are kept for future reference.
Most tax e-filing software and portals, such as TurboTax, generate an email acknowledgment upon filing completion. This email acknowledgment counts as your filing receipt.
3. Business Income Receipts
This is technically called gross receipts by the IRS. It refers to a business’s generated income within a given fiscal year.
A business’s payable tax greatly depends on the amount of money it’s making, among other things. This is why all documents pertaining to its gross sales must be kept.
Pertinent records include cash register tapes, invoices, receipt books, and cash and credit sales (deposit information). The IRS Form 1099-MISC must also be accomplished.
In case you have inadvertently underreported your business income, it is best to keep records for at least six years after the corresponding tax return had been filed.
4. Documents Pertaining to Assets/Property
This category refers to a business’s non-liquid assets. These assets cover the physical structure wherein a business is being run, as well as all the equipment and furniture in it.
Here, the pieces of information needed by the IRS include an asset’s purchase price, improvement costs, and actual value after gain or depreciation, among other things.
Usually, these details are adequately summed up in records such as proofs of payment, purchase invoices, sales receipts, and real estate closing statements.
Sold assets, as well as those ruined in calamitous events, should also be duly recorded. The latter affords businesses tax deductions.
5. Investment Income
If your business has an existing investment portfolio, its corresponding records must be kept just in case the IRS schedules you for an audit. This record-keeping allows two benefits.
First, you will know how your investment is doing. Second, you will know just how much your business owes the IRS for any investment income gained.
For example, dividends are taxable. That is regardless of if the amount received was reinvested in the principal investment.
The same rule applies to sold investment. So, to be on the safe side, and lest the IRS overcharge your investment income, pertinent records regarding their actual value must be kept at all times.
Dividends Definition: A portion of a business’s profit paid to its shareholders
6. Purchase Documents
This category covers all items bought by a business from suppliers to resell to customers. For instance, in the case of manufacturers, purchases refer to raw materials needed to produce a specific product.
Basically, purchase documents should clearly indicate the amount paid by your business to a supplier. This detail is outlined in records such as cash register tape receipts, invoices, canceled checks, credit card receipts and statements, and other proofs of electronic funds transfer or payment.
Signed contracts with vendors and suppliers can also come in handy. Keep in mind that having these records could spell the difference between your business getting its deserved purchase-related write-offs and getting slapped with exorbitant business income taxes.
7. Operating Cost Receipts
These are the expenses associated with keeping a business running. Operating costs include utility bills and equipment repairs, among others.
Here pertinent documents cover the likes of petty cash slips, invoices, cash register tapes, canceled checks, account statements, and other proofs of payment or electronic funds transfer. Again, it is important to point out that business tax deductions and write-offs rely on these records.
It pays to have these records at your disposal should the IRS flag you for an audit and threaten to collect a much bigger tax due than what your business actually owed.
8. Miscellaneous Expenses
These expenses refer to transportation, travel, entertainment, and gift purchases. If adequately supported with records, such as cash register tapes, invoices, and other proofs of payment or fund transfer, these expenses can be deducted from a business’s tax due.
For example, the IRS allows 58 cents of deductible gasoline expense for each mile in 2019. Meanwhile, business-related out-of-town travels are fully deductible.
Travel deductions cover both airfare and lodging. However, the reason for these business travels must be adequately substantiated as per the guidelines in the IRS Publication 463.
If you’ve included these deductions in your business’s tax returns, you must hold onto their supporting documents for at least two years after you’ve paid their corresponding return.
9. Employment Taxes Documents
Businesses are legally mandated to pay taxes for each of their employees. Records related to these tax payments must be kept for at least four years, alongside other employment documents.
Employment records must include the following details:
- Employer identification number
- Dates and amounts of employment tax deposits made
- Amounts and dates of all annuity, wage, annuity, pension payments.
- Forms W-4, W-4P, W-4S, and W-4V (employees’ and recipients’ income tax withholding allowance certificates)
Receiving a notice of intent to audit from the IRS does not automatically equate to your business being suspected of any wrongdoing. And so long as your tax records are in place, there’s no reason to stress out over an impending tax probe.
Please share some of your best practices with regards to safekeeping tax documents in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.