Navigating the Paper Trail: IRS Record Retention for Small Businesses and Individuals

Tax Documents Retention

Keeping accurate and organized records is a crucial, though often overlooked, aspect of tax compliance. The IRS requires small businesses and individuals to maintain certain records; understanding these requirements can save you from potential audits, penalties, and headaches.  

Why Does the IRS Require Record Retention?

The IRS mandates record retention to verify the accuracy of your tax returns. Proper records prove income, expenses, deductions, and credits claimed. In the event of an audit, these records are essential for substantiating your tax filings.  

General Guidelines for Individuals:

For most individuals, the general rule of thumb is to 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. This period covers most audits. However, there are exceptions:  

• If you file a claim for a credit or refund after you file your return: 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, or two years from the date you paid the tax, whichever is later.  

• If you file a claim for a loss from worthless securities or bad debt: Keep records for seven years from the date you filed your return claiming the deduction.  

• If you don't file a return: Keep records indefinitely.

• If you file a fraudulent return: Keep records indefinitely.

  
  

Specific Records Individuals Should Retain:

• W-2 forms  

• 1099 forms (e.g., 1099-MISC, 1099-INT, 1099-DIV)  

• Receipts for charitable contributions

• Medical expense records

• Records of home purchases or sales  

• Investment account statements  

• Records related to IRA or 401(k) contributions

  
  

Below is Table 3. Period of Limitations in IRS Publication 583

If you…	Then the period is…
1. Owe additional tax and situations (2), (3), and (4), below, do not apply to you	3 Years
2. Do not report income that you should report and it is more than 25% of the gross income shown on the return	6 years
3. File a fraudulent return	Not Limited
4. Do not file a return	Not Limited
5. File a claim for credit or refund after you filed your return	Later of: 3 years or2 years after taxwas paid
6. File a claim for a loss from worthless securities or a bad debt deduction	7 years

Source Publication 583

Record Retention for Small Businesses:

Small businesses face more complex record-keeping requirements. The general rule of three years also applies, but specific business types and transactions may require longer retention periods.

Specific Records Small Businesses Should Retain:

• Sales records (invoices, receipts)  

• Purchase records (vendor invoices, receipts)  

• Payroll records (W-2s, 941 forms)

• Bank statements and canceled checks  

• Loan documents

• Asset purchase and depreciation records  

• Inventory records  

• Employment tax records: Generally, you must keep employment tax records for at least four years after the date that the tax became due or was paid, whichever is later. (IRS.gov Publication 583)  

• Business expense documentation.  

  
  

Methods of Record Keeping:

The IRS accepts both paper and electronic records. Electronic records must be maintained in an accessible and legible format.  

• Paper records: Store in a secure, organized location.  

• Electronic records: Use reliable software and backup systems. Ensure that records are easily retrievable.  

  
  
  
  

Key Takeaways:

• Accurate and organized records are essential for tax compliance.  

• The general rule for record retention is three years, but exceptions exist.

• Small businesses have more complex record-keeping requirements.

• The IRS accepts both paper and electronic records.

• Utilize IRS resources for guidance.

  
  

By adhering to IRS record retention guidelines, small businesses, and individuals can possibly minimize the risk of tax complications and ensure a smoother tax filing process.

IRS Resources, and the source for this article.

The IRS provides valuable resources to help taxpayers understand record retention requirements:

• IRS Publication 583, Tax Records You Should Keep: This publication offers detailed guidance on record-keeping for small businesses.

  • Source: IRS.gov Publication 583: https://www.irs.gov/publications/p583

• IRS.gov Website: The IRS website provides comprehensive information on tax laws and regulations.

  • Source: IRS.gov: https://www.irs.gov/

• IRS Topic 305, Recordkeeping: Provides a general overview of recordkeeping.

  • Source: IRS.gov Topic 305: https://www.irs.gov/taxtopics/tc305

Disclaimer

The information in this material is not intended as tax or legal advice. Synergy Wealth Management does not advice tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities.