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