Everyone has probably heard the rule of thumb to keep tax records for seven years before destroying them. While that’s not bad advice, did you know there’s more to business tax record keeping than that? The IRS outlines different types of business tax records and how long you should keep each:
Business Income Tax Returns
Bare minimum, the IRS suggests business owners keep their tax returns for at least three years. However, there are limitations. If you do not report 25% or more of your gross income, you should keep records for 7 years (the IRS can come after you up to 6 years after this happens). If you don’t report at all or if you report a fraudulent return, you need to keep your records indefinitely. >>> Learn what else the IRS has to say about Business Income Tax Returns
Employment Tax Records
According to the IRS, employment tax records have a 4-year window. Information you should include are your EIN, dates and amounts of all wages and payments, amounts of reported tips, employee information (including social security numbers), employment dates, and copies of all returns filed. >>> Find out more from the IRS about Employment Tax Records
Supporting “Burden of Proof” Documents
Along with your business tax records, you need to be keeping records of what is called “supporting documents.” These are the documents you use to prove your tax return was filed accurately. Receipts are the most common type of supporting document business owners should keep on hand. 1099’s are another type of document it’s important to keep track of. These documents should be organized and stored with each corresponding year’s tax return. Accordingly, keep burden of proof until you dispose of a year’s tax records. >>> Read up on how the IRS defines Burden of Proof and what documents you should keep
Q: Is there any benefit to keeping business tax records indefinitely?
A: The short answer is “no.” Unless you failed to file a return or filed a fraudulent return, there is no benefit to keeping your tax records indefinitely. In fact, doing so turns those documents into unnecessary liabilities. Tax records contain all the information a thief needs to steal your identity. The less of this information you store the less chance for it to be stolen. Again, in general, you actually only need to keep about 3 years’ worth of tax records in most cases.
Q: How long do I need to worry about being audited?
A: In 2014, only 0.86% of tax returns were audited. This means your odds of being selected for an audit are very low. The IRS can go back 6 years to perform an audit. In other words, you’re in the clear for a tax return once its 6-year-anniversary is up. One thing to keep in mind is that audits aren’t nearly as scary as people think. In fact, sometimes they’re simply a matter of mailing in missing information.
If you still have questions about your tax records and business accounting, we’re happy to help! Contact us and we’ll get back to you soon.