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IRS Offers Advice on Small Business Record Keeping

IRS Tax Tip 2019-157

In a Tax Tip, the IRS has offered advice on small business record keeping. The advice concerns both how to keep records and for how long to keep records.

Background. Because of the period of limitations that applies to income tax returns (i.e., the period of time in which a taxpayer can amend a tax return to claim a credit or refund, or the IRS can assess additional tax), the IRS recommends that taxpayers keep records for the following time periods:

  1. Keep records for three years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for six years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later. (IRS.gov website)

IRS advice. In Tax Tip 2019-157, regarding small business record keeping, the IRS recommends:

  • Small business owners may choose any recordkeeping system that fits their business. They should choose one that clearly shows income and expenses. Except in a few cases, the law does not require special kinds of records.
  • How long an business owner should keep a document depends on several factors. These factors include the action, expense, and event recorded in the document. The IRS generally suggests taxpayers keep records for three years, but longer if a situation described above applies.
  • A good recordkeeping system includes a summary of all business transactions. Businesses usually record these transactions in books called journals and ledgers, which business owners can buy at an office supply store, or keep them electronically. All requirements that apply to hard copy books and records also apply to electronic business records.
  • The responsibility to validate information on tax returns is known as the burden of proof. Business owners must be able to prove expenses to deduct them.
  • Businesses that keep paper records should keep them in a secure location, preferably under lock and key, such as a desk drawer or a safe.
  • Businesses that keep records electronically on a computer should always have an electronic back-up, in case the hard drive crashes.

References: For discussion of the period of limitations, see FTC 2d/FIN ¶T-4000 et seq.; United States Tax Reporter ¶65014.