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Recordkeeping Requirements for Individuals and Businesses |
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For Individuals |
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Here's a quick rundown of suggested recordkeeping for individuals. |
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Keep your
critical records indefinitely. Other records can safely be discarded after
several years. |
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Keep tax
returns (and any records used to prepare them) at least three years after
the filing date if you have only W-2 and interest income, preferably six
years if your returns are more complex. The IRS has six years to audit you
if it suspects you've underreported income by more than 25%. |
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For
investments in real estate, keep records until at least six years after
the filing date of the return reporting the sale of that property. |
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For
investments in stocks, bonds, and mutual funds, keep year-end brokerage
statements and 1099s and toss interim statements. Retain all brokerage
confirmations showing your cost basis. (You can reduce capital gains taxes
by selling specific higher-cost shares.) |
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For your home,
keep the settlement statement and records of home improvements. These
validate your cost basis for future home sales if they are needed. |
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Some records
should be retained permanently. This applies to IRAs and pensions (Forms
1040, 8606, 5498, and 1099-R), wills, divorce decrees, and most other
legal documents. |
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You don't need
an elaborate recordkeeping system. File tax returns separately by year,
and file investment records by broker. For expenses, even an accordion
file tabbed by category works wonders. Within a given category, use a
separate envelope for each year's receipts and canceled checks, and
enclose a tape showing the expense total. |
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What records should your business keep, and how long should you keep them? There are several categories of records that are important to a business, some for internal purposes and some for tax returns and other government requirements. Let's take a look at these by category. |
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Tax records. First, consider the records you need to
substantiate your annual income tax return. The IRS says that you must
maintain adequate records, so support almost every item of income and
expense that you claim. That means you must be able to produce receipts,
invoices, canceled checks, or banking records supporting all expense
items. Similarly, you should keep sales slips, invoices, or bank records
to support all income items. |
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Accounting records. Most businesses have adequate accounting
systems to capture routine transactions, but not for nonroutine
transactions such as the purchase of depreciable assets. When you buy a
car, computer, or piece of office equipment, be sure to file all purchase
documents, assign an inventory number, and immediately set up a
depreciation schedule. |
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Travel and entertainment expenses. Good recordkeeping for
travel and entertainment expenses is essential. Although the rules can be
complex, in general you should capture where, when, who, how
much, and the business purpose for each expense. A well-designed
standard expense report form can help insure that your records contain all
the required information. Also, if you have employees who drive on company
business, make sure they keep an auto log showing the miles driven for
each trip. |
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IRS audits. Generally, the IRS can audit a tax return for
three years after the date it was due or the date the tax was paid,
whichever is later. However, if there is a major understatement of income,
they can audit for six years after the due date (or almost seven years
after the tax year). For that reason, you should keep most income tax
records for seven years. The IRS requires records relating to employment taxes to be kept for at least four years after the date of the return or the date the tax was paid, although here again a seven-year rule is safer. |
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Corporate records. Every incorporated business needs good
corporate records, including documents associated with forming the
company, bylaws, business licenses, and minutes of all board meetings.
Shareholder records should include stock registers and records of all
share issuances and redemptions. Also keep copies of all contracts and
leases. Finally, don't forget current and terminated employee files, and
records of employee pension or profit sharing plans. Most corporate and
employee pension plan records should be kept indefinitely. |
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Computer recordkeeping. The IRS has established a series of
rules and recommendations concerning how electronic records must be
maintained. Generally, such records should contain the same information as
paper records and should be kept for the same length of time. |
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| © This material is copyrighted 2002. |
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STEVEN C. RESUTA Certified Public Accountant 73 North Market Street Elysburg, PA 17824-9619 www.RESUTA.com E-mail: SResuta@aol.com (570) 672-1040 FAX (570) 672-1247 |
