April 15 has come and gone, the taxes are filed, the checks are written, and you-re finally kicking back with a glass of Sauvignon Blanc to plot the year ahead. Eventually the question creeps into your head: What do I do with all those files of documents I used to prepare my return? Payroll information, business expenses, and various other documents take up vast amounts of space in the typical small business file cabinet and are rarely, if ever, re-opened. Do we really need to keep it all? And for how long?
The answers, according to Michael Rozbruch of Tax Resolution Services, are yes, and seven years, respectively.
There are exceptions and alternatives to this rule, but to make things simple, your best bet is to stick with the seven years rule whether you-re a business with a few dozen employees or a sole proprietorship running everything through your personal return.
Rozbruch says the reason for the rule is due not just to the risk of a federal tax audit but due to state audits, too. Says Rozbruch, -In California… the IRS generally only goes back three years [for audits]. But if the IRS deems you unreported 25 percent of your income, they are allowed, under law, to audit you for the last six years. So since during the course of an audit the IRS can go back and re-examine six years- worth of returns, I advise my clients to keep everything for seven years.-
What needs saving? Pretty much everything. Adds Rozbruch, -Keeping careful track of receipts and documentation is a must for any business owner. Plus, if you’re audited by the IRS – and more small businesses are being targeted by the IRS today than in the past – you’ll need to provide the IRS auditors with a full paper trail, or risk paying additional taxes and penalties. You should keep cancelled checks, credit card statements, charitable contribution receipts – anything you’re including on that tax return.-
Of course, technological solutions have eased some of the need for paper recordkeeping. If your statements and invoices are available online or in electronic form, they need not be saved in paper format also, since they can be retrieved at will. Just make sure that any receipts saved on your computer are backed up regularly, and that your bank and other online vendors maintain copies of your documents for that period: Many institutes make only 12 to 18 months- worth of statements available online before they are deleted, so it might make sense to download all your statements once a year.Christopher Null is the editor of the Intuit Small Business Blog. A 20-year veteran of technology and business journalism, he also edits the movie review website Filmcritic. com and writes daily about wine and spirits at Drinkhacker. com. View all posts by Christopher Null This entry was posted in Leadership Profiles, Money, Taxes and tagged audit. Bookmark the permalink.