I’m glad you asked. The Internal Revenue Service has publications that address this very issue. Publication 552 addresses Recordkeeping for Individuals. Publication 583 addresses Starting A Business And Keeping Records for Businesses. Publication 463 addresses Travel Expenses And Related Record Keeping. The following information was extracted from these publications.
IRS states that “You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS can assess additional tax.”
The following table contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.
|IF you..||THEN the period is…|
|1 Owe additional tax and (2), (3), and (4) do not apply to you||3 years|
|2 Do not report income that you should and it is more than 25% of the gross income shown on your return||6 years|
|3 File a fraudulent return||No limit|
|4 Do not file a return||No limit|
|5 File a claim for credit or refund after you file your return.||Later of 3 years or 2 years after you filed your return after tax was paid.|
|6. Your claim is due to a bad debt deduction.||7 years|
|7 File a claim for a loss from worthless securities||7 years|
Property. Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up. You must keep the records on the old property, as well as the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Keeping records for nontax purposes. When your records are no longer needed for tax purposes, do not disgard them until you check to see if they should be kept longer for other purposes. Your insurance company or creditors may require you to keep certain records longer than the IRS does.
If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. This documentation must be sufficiently detailed to show all of the following items.
- Functions being performed as the data flows through the system.
- Controls used to ensure accurate and reliable processing.
- Controls used to prevent the unauthorized addition, alteration, or deletion of retained records.
- Charts of accounts and detailed account descriptions.
Microfilm and microfiche reproductions of general books of accounts, such as cash books, journals, voucher registers, and ledgers, are accepted for recordkeeping purposes if they comply with Revenue Procedure 81-46.
Electronic Storage System
Records maintained in an electronic storage system are accepted for recordkeeping purposes if the system complies with Revenue Procedure 97-22. An electronic storage system is one that either images hardcopy (paper) books and records, or transfers computerized books and records to an electronic storage media, such as an optical disk.
TIP: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you later file an amended return.
Employment taxes. If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later.
Assets. Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Phil is a Texas Certified Public Accountant who helps small businesses identify targeted goals, the weak links in their systems and financial management, as well as offering a comprehensive range of accounting, financial, tax, and management advisory services to businesses, individuals, and other organizations. This helps small businesses become more profitable and allows the owners to have more free time to enjoy life.