It is of course important to keep good records for tax compliance purposes. But what kinds of records should you keep and for how long?
In this post, we will provide some basic answers to these questions.
Last spring, we discussed the time limits that apply to tax audits. As we noted in our April 21 post, the IRS can generally go back three years in looking at your past taxes. But the look-back period is longer in cases of substantial error or when there are allegations of criminal tax evasion or fraud.
What this means, in practice, is that keeping financial records that relate to taxes should be for a minimum of three years. But employment tax records must be kept for at least four years. There are also various rules in particular situations, however, that may require keeping records for six or even seven years.
And if you don't file a tax return, the IRS recommends keeping records indefinitely.
What kinds of records are we talking about it?
For starters, it's useful to have copies of filed tax returns. This does not only help with tax compliance. It also helps in other contexts, such as in showing proof of income when applying for a loan.
In general, the IRS does not require any specific type of recordkeeping system. But for small businesses or self-employed taxpayers, the nature of your business or work will affect what records you need to keep for tax purposes. For example, businesses need to keep supporting documents such as invoices, receipts and cancelled checks that can be used to verify the entries in accounting books.