Whether you've got them in a shoebox or scanned and stored on a meticulously backed-up hard drive, your business tax records take up both physical space and precious brain real estate. At the end of the day, your peace of mind is more valuable than the space in your closet – especially if you happen to be one of the 0.8 percent of taxpayers who gets audited by the IRS every year.
Depending on your business' particular circumstances, the IRS typically recommends keeping records for three to seven years.
Why You Should Keep Business Tax Records
During tax season, current and recent records help keep itemized deductions in order and provide proof for other deductions, which can go a long way toward maximizing your return or minimizing what you pay. Likewise, you'll need business records related to property to figure depreciation, amortization or depletion deduction when you file.
For most taxpayers, the phrase "IRS audit" is scarier than a fire-breathing dragon. Consider truthful and organized business tax records the next best thing to a suit of armor if an audit ever rears its ugly head.
Business documents to keep include all account transaction records, accident reports, annual reports, bank statements, Board of Director info, business formation documents, cancelled checks, corporate by-laws, employee benefits, expense reports, human resource records, meeting minutes and more.
How Long Should You Hold On?
If you've responsibly filed a non-fraudulent return and reported all of your business income, the IRS recommends keeping your records on-hand for three years, or doue years after the date of your tax payment for employment tax records.
If your business didn't fully report its income or did not file a return for any given year, the IRS advises keeping your records accessible for seven years. Seven is also the magic number if you file a claim or loss from worthless securities or bad debts.
In most cases, the IRS can pursue your business for up to six years after your filing if you fail to report income in excess of 25 percent of your company's gross earnings.
How Long Do You Need to Keep Closing Documents?
The ground rules change a bit when you're dealing with business records related to property; in the case of closing documents, the IRS says you should hold on to them until the period of limitations expires for the year in which you dispose of the property.
Even if you moved ownership of property via a nontaxable exchange, the IRS recommends holding on to records for property that you gained or gave up.
For property-related deductions like a home office or theft losses, keep photos on file as proof.
What Do You Do if There Is an Audit?
The types of IRS audits vary, but solid recordkeeping is an invaluable defense against just about all of them.
In the case of a correspondence or office audit, the IRS simply contacts you asking for more info to support your tax return, to be delivered by mail or in-person at an IRS office, respectively. A random audit, which reviews your entire return point-by-point, is a little tougher.
For any type of audit, keeping thorough, air-tight records during the tax year in question is the best way to prepare. Speaking to Fox Business, Bill Smith of accounting firm CBIZ MHM says, "It becomes so much harder to get the documents together if a year or so has past. When you file your return you are better off building a file and organizing them in anticipation of an audit than reacting to an IRS audit.”