Accurate recordkeeping is a part of owning a small business.
The more effective you are in organizing your company's records, the easier it is to track your progress and prepare financial statements for lenders, investors, tax preparers, and others. In some cases, a recordkeeping failure can have significant practical and financial consequences for your organization.
The IRS requires taxpayers and businesses to maintain tax records for a period of time following the filing of your annual return. Although the duration of time you need to maintain these records can vary according to your individual circumstances, you'll need to incorporate IRS tax record requirements into your recordkeeping routines.
Why does my business need to maintain tax records?
There are a variety of reasons why tax record maintenance makes sense for your business. A well-organized record maintenance system aids in the preparation of company financials and other documents. But it also plays a critical role in tracking depreciation, monitoring deductions, and providing information for future tax filings. If your business is audited, tax records may be your only defense.
What records do I need to keep?
Right off the bat, you'll want to maintain copies of any filings you've submitted to the IRS. However, it's just as important to maintain receipts, notifications, correspondence, and other material – essentially anything that supports your tax filings.
Is there a required way to maintain IRS records?
The IRS does not require taxpayers to adopt a specific system for maintaining tax records. They only require that the system allows for the accurate recordkeeping of income, expenses, and other tax-related items. In some cases, you may be able to digitize tax records for electronic archiving – but keep in mind that you are required to produce your records to the IRS upon request.
When is it safe to discard tax records?
There are no universal limits for the period of time you need to keep tax records. As a rule of thumb, records should be maintained for as long as you think you may need them to prove the accuracy of your returns. The IRS requires employers to maintain employment tax records for a period of four years. IRS audits normally cover a period of three years. But if discrepancies are found, it could go back farther. Generally plan on keeping income tax records for at least five years (if not longer) before checking with your tax preparer to make sure it is safe to dispose of them.