When it comes to keeping their businesses organized, most tax professionals tell me they have two kinds of clients: those who keep meticulous, by-the-book records, and those who are disorganized and have no idea what records, if any, to keep.
Of course, the more organized client is the preferred client, but even the ones who are organized may not know how long to keep their records and documents. Encouraging your clients to maintain organized tax records offers a more efficient way to help you prepare their returns and address any IRS inquiries about the return.
Guidance for Your Clients
After the tax return is filed, the period of limitations depends on the situation:
- Taxpayers who filed a non-fraudulent return that correctly reported all income should keep the records for three years.
- Records should be kept for six years if the taxpayer failed to report the income and that income represents more than 25 percent of gross income shown on the return.
- For non-filed or fraudulent returns, the taxpayer should keep the records forever.
The following records should be retained by individual taxpayers for at least three years:
- Bills, credit card and other receipts, and invoices
- Mileage logs
- Canceled, imaged or substitute checks, or any other proof of payment
- Other records that support deductions or credits
Records relating to property should be retained for at least three years after the property is sold or disposed. Examples include:
- Homes and improvements
- Stocks and investments
- IRA transactions
- Rental property
Small business owners must keep all employment tax records for at least four years. The following documents should be retained by the small business owner:
- Gross receipts: cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, and Forms 1099-MISC and 1099-K.
- Proof of purchases: canceled checks, cash register tape receipts, credit card sales slips, invoices, account statements and petty cash slips.
- Documents to verify assets: purchase and sale invoices, real estate closing statements, and canceled checks.
For more information, visit this IRS webpage on record retention guidelines.