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Tax records should be kept on a year-round basis, not hastily assembled just for your annual tax appointment. Without tax records, you can lose valuable deductions by forgetting them on your tax return, or you may have unsubstantiated items disallowed if you are audited.

Generally, returns can be audited for up to three years after filing. However, the IRS may audit for up to six years if there is substantial unreported income. The three and six year limits start with the filing of a tax return; if no return is filed, the time limit never starts to run.

Which records are important?

	Records of income received
	Expense items, especially work-related
	Home improvements, sales, and refinances (for homes with profit potential of $250,000 or more)
	Investment purchases and sales information
	The documents for inherited property
	Medical expenses
	Charitable contributions (records vary with value of gift)
	Interest and taxes paid
	Records on nondeductible IRA contributions

The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.

What records? All businesses should have a permanent set of books which summarize individual deposits, disbursements, and items of adjustment. These records should be retained indefinitely. Permanent records also include those needed to prove the basis (cost) of depreciable assets.

Supporting documents may be needed to validate the journal entries if your returns are examined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year has passed.

The supporting documents the IRS reviews include bank statements, cancelled checks, payroll records, invoices, and the like. You should also retain documents supporting deposits which do not reflect income, such as loan documents. If storage is a problem, consider microfilming these documents.

What happens if your records are inadequate? If you fail to retain adequate records to support the items claimed on your returns, the IRS has authority to reconstruct your income using one of several methods, including estimating increased net worth, looking at bank records, or estimating the raw materials used in manufacture. Whatever method the IRS uses, you have the burden of proof if you dispute their estimate. Without adequate records, proving the IRS estimates wrong is difficult, at best. You could end up with an assessment for additional taxes, plus penalties and interest.

How long should records be kept?

Just how long you should keep records is partly a matter of judgment and a combination of state and federal statutes of limitations. Federal tax returns can be audited for up to three years after filing (six years if underreported income is involved). It is a good idea to keep most records for six years after the return filing date.

There are some records worth keeping permanently, partly due to long-term needs and partly because they take up very little room. Consider permanently retaining a copy of each year's tax return. Contracts, real estate buy/sell records, and records of property improvements should be retained for seven years after the property is sold.

Here are recommended retention periods for various records:

Requirements for computer-maintained records are generally the same as for manually kept records.

Please call us; we will be happy to assist you with a system of record retention.