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I am a small business owner and how long should I keep tax records for and what type of records should I keep?

 

This is a common question that I get from many of my small business clients throughout the year and actually the answer that it depends!

For instance, most people are aware that the IRS has three (3) years from the filing date or date of assessment for auditing your tax returns, …so that the easy answer would be keep all your records for at least 3 years from this date. But here is where it starts getting a bit complicated. So if you fail to report more than 25% of your gross income, then the IRS can exceed the three year period above and go back and audit for the last six (6) years from the filing date or date of assessment. And finally, if you have never filed a tax return or you have “committed fraud” then the IRS has no Statute of Limitations and can go back an unlimited period that the IRS can audit you.

So usually I tell clients to be on the safe side keep records for seven (7) years from the date of filing the return. For instance, if you filed your 2010 tax return on April 15th of 2011, then you can shred these records after April 15th, 2018.

Also, as a small business owner, you might ask yourself how to keep proper records for an IRS audit? What types of books and records should be kept to keep from getting beat up by an overaggressive auditor n an IRS examination.

The tax code requires that taxpayers that own a business, IRS rules require that every person liable for any tax, keep adequate books and records to determine, gross income, deductions and credits. So what are adequate books and records? In practice if you are a small business you should have an accounting system that generates a profit and loss statement, balance sheet and a general ledger that gives adequate detail for all accounting entries to determine gross income and deductions. This also means the IRS may want to review and audit invoices and receipts for tax deductions. What I have found in practice is that many small business owners in today’s social media and electronic age do not keep receipts or adequate records, and in fact do not even keep their bank statements or cancelled checks.

If you would like to have a consultation to discuss a review of your accounting systems and recordkeeping policies please contact me at 855-TAX-FIXX (855-829-3499).