Do you struggle with paper pile up? When will it stop? There are invoices and receipts and bills and checks, bank statements and the list goes on! How long do we need to hold onto this paper trail anyways? Bonfire season is right around the corner. How much of this paperwork could be torched?
First, the good news is that the IRS accepts records in digital format. So maintaining your documents does not have to be the space consuming hassle that it used to be! (Ask me about apps that you can use to capture pictures of your receipts… and even forward them right on to your bookkeeping.) But document retention is still essential to successful business management and required if you go through an audit.
So do you need to keep that 1981 receipt from the Commodore Vic-20 purchase?
Here are a few “document shredding guidelines”:
· Statute of Limitation – To put it simply, if the IRS audits or needs additional information on your tax return, you’re going to need to have your documents to show proof of the amounts reported on your tax return. And remember, documents in digital format are acceptable.
· As a general rule – the IRS cannot go back more than 3 years to adjust your filed return. The period starts the later of the date the return was filed or the due date.
· Underreported Income – If the IRS has reason to believe the income on a return is understated by more than 25% they can go back 6 years.
· Loss on worthless securities / Bad Debt deduction – if you have either of these items reported on your return the IRS can go back 7 years to get to it. If they are examining a return, they have the right to look at all income and deduction items, not just the ones that extend the limitations period.
· Fraud – NO LIMIT! Do not commit fraud. And that’s worth repeating: do not commit fraud. If that were to happen, make sure you keep all your documentation for the legitimate income and expenses reported until death do you part.
· No return filed – Because the limitation is based on the date a return is filed, no return means the period cannot start. If your business receives a 1099-Misc from customers reporting your income to the IRS and your business does not file a tax return matching income for that year the IRS can file a return on your behalf. The IRS will only know your income. They won’t know your expenses.
Employment Taxes – keep all records related to employment taxes for the later of 4 years after the date the taxes were either due or paid.
Assets – keep records for an asset based on the limitations for when the asset was disposed of, not purchases. So for example, you purchase a company vehicle in 2011 and dispose of it in 2017. Records should stay on file for 3 years after the 2017 tax return is filed in 2018.
So do you need to keep that 1981 receipt from the Commodore Vic-20 purchase?
Assuming you have not committed fraud and you file your return each year, build a bonfire, grab your marshmallows and your best roasting stick and toast that receipt!
And as for the documents that you now know that you need to keep, scan it, save it, back it up regularly. File your return on time and don’t commit fraud
Here are some suggestions for record retention guidelines.
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