FileLater Online Income Tax Extensions

Authors Row  

Why You Should Care About Your Recordkeeping

© by Fred W. Daily

The first commandment of the tax code is: Thou shall keep "records appropriate to your trade or business" (IRC 6001). Never forget that the IRS has the right to audit and inspect your records. You can incur all kinds of penalties for not keeping records, including whopping audit bills.

You're not alone if you hate the paperwork part of being in business. But, face facts--record-keeping goes with the territory. The good news is that the tax code doesn't require business records to be kept in any one uniform fashion. Whatever system works for you is OK--as long as it paints a true picture of your enterprise's income and expenses. Since no two enterprises are alike, no two record-keeping systems are exactly the same.

Records can also serve as an early warning system to let you know whether changes need to be made in your venture. Are your travel expenses out of control? Is your cash flowing out too fast? Operating without good records is like flying in a dense fog with no instruments.


What kind of records do I need to keep?

  • For your checking account, keep monthly bank statements and canceled checks, if the bank returns them to you.
  • Keep deposit slips showing the source of the bank deposits as well. Otherwise, IRS auditors may presume that all bank deposits represent "income", which may be wrong. For instance, loans and personal funds deposited in your business account are not income. Don't rely on your memory; it is up to you to prove to a suspicious auditor that it wasn't income.
  • Keep receipts. Those pieces of paper from transactions, usually expenses, are the second type of records to be saved. Some folks use an accordion file or a bunch of manila envelopes to keep receipts. Be sure to label and sort not by date but by category, such as "car," "building maintenance," and "insurance."
  • Invoices and purchases orders for equipment should be kept separately from other expenses, since asset purchases are taxed differently than other expenses.


How long should I keep my records and receipts?

Three years is the normal time limit for an IRS audit. So, the very minimum holding period for records is three years after the date you file your tax return. However, don't rush to throw out those old boxes just yet. There is a second "statute of limitation" given to the IRS of six years for ferreting out serious tax misconduct. Six years is a wiser rule of thumb. However, some records must be kept almost indefinitely. These are records of asset purchases, such as your warehouse building or machinery used for manufacturing. For long term asset costs, keep the records six years after you dispose of the item no matter how long ago you bought it.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

SEARCH:

You can search for information in the entire Authors Row section, or in the entire site. For a more focused search, put your search word(s) in quotes.





Fred W. Daily Main | Authors Row Main | Home