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Maintaining Proper Tax Records: What Documents to Keep

By Dean ‘Mac’ Nichols, Attorney

Tax Featured | Layman & Nichols LawAt the end of every tax year, most of us are left with copies of our tax forms and folders full of receipts. But, after April 15, what do you do with them?

According to federal law, you should be maintaining records of your financial documents—tax returns, supporting documents—that span at least the past three years. Known as “the three-year rule,” this document retention can lead many individuals to believe that they’re in the clear so long as they’ve retained documents for this period of time.

Here’s the caveat: if the IRS thinks you make have significantly underreported your income (by 25+ percent), it may go back as far as six years in an audit. Also, there’s no period of limitation if they believe there is any indication of fraud, or if you have not filed a return, which means they can require you to produce your records. Use these tips to protect yourself and your business from not having the proper records for an audit:

For Businesses

Keep these documents for at least one year:
• Correspondence with Customers & Vendors
• Duplicate Deposit Slips
• Purchase Orders
• Receiving Sheets
• Requisitions
• Stenographer’s Notebooks
• Stockroom Withdrawal Forms

Keep these for at least three years:
• Employee Personnel Records (even after termination)
• Employment Applications
• Expired Insurance Policies
• General Correspondence
• Internal Audit Reports
• Internal Reports
• Petty Cash Vouchers
• Physical Inventory Tags
• Savings Bond Registration Records of Employees
• Time Cards For Hourly Employees

Keep these for at least six years:
• Accident Reports, Claims
• Accounts Payable Ledgers & Schedules
• Accounts Receivable Ledgers & Schedules
• Bank Statements and Reconciliations
• Canceled Checks
• Canceled Stock & Bond Certificates
• Employment Tax Records
• Expense Analysis & Expense Distribution Schedules
• Expired Contracts, Leases
• Expired Option Records
• Inventories of Products, Materials, Supplies
• Invoices to Customers
• Notes Receivable Ledgers, Schedules
• Payroll Records & Summaries, including payment to pensioners
• Plant Cost Ledgers
• Purchasing Department Copies of Purchase Orders
• Sales Records
• Subsidiary Ledgers
• Time Books
• Travel & Entertainment Records
• Vouchers for Payments to Vendors, Employees, etc.
• Voucher Register & Schedules

And to be particularly careful, these are the documents your business should keep forever:
• Audit Reports from CPAs/Accountants
• Canceled Checks for Important Payments (especially tax payments)
• Cash Books, Charts of Accounts
• Contracts, Leases Currently in Effect
• Corporate Documents (incorporation, charter, by-laws, etc.)
• Documents substantiating fixed asset additions
• Deeds
• Depreciation Schedules
• Financial Statements (Year End)
• General and Private Ledgers, Year End Trial Balances
• Insurance Records, Current Accident Reports, Claims, Policies
• Investment Trade Confirmations
• IRS Revenue Agents. Reports
• Journals
• Legal Records, Correspondence and Other Important Matters
• Minutes Books of Directors and Stockholders
• Mortgages, Bills of Sale
• Property Appraisals by Outside Appraisers
• Property Records
• Retirement and Pension Records
• Tax Returns and Worksheets
• Trademark and Patent Registrations

For Individuals

If you have a mutual fund and/or IRA, it’s important to keep monthly and quarterly statements each year until your year-end statement has arrived, but you don’t need to keep the smaller statements longer than one year.

Keep these for at least three years:
• Credit Card Statements
• Medical Bills
• Utility Records
• Expired Insurance Policies

Keep these for at least six years:
• Supporting Documents for Tax Returns
• Accident Reports and Claims
• Medical Bills (if tax-related)
• Sales Receipts
• Wage Garnishments
• Other Tax-Related Bills
Keep these forever, in a marked file in case of necessity:
• CPA Audit Reports
• Legal Records
• Important Correspondence
• Income Tax Returns
• Income Tax Payment Checks
• Property Records/Improvement Receipts (or six years after property sold)
• Investment Trade Confirmations
• Retirement & Pension Records (Forms 5448, 1099-R and 8606, until all distributions are made from IRA or other qualified plan)
With these in mind, you’re better equipped to have the information you need should an audit arise.

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