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Statute of Limitations
At a minimum, you should keep business tax returns and supporting documentation for the length of the IRS statute of limitations. As long as you didn't intentionally misstate or omit tax information, the IRS has a limited time frame to audit or query your tax information. For most situations, the statute of limitations is three years from the date your return is due. That means that the IRS typically can only assess additional taxes for the last three tax years.
Other Time Frames
There are a few exceptions to the three year statute of limitations rule. The IRS recommends you keep employment tax records for at least 4 years. Keep tax information for 6 years if you think there's a possibility you underreported income by more than 25 percent. If you wrote off bad debts or claimed a loss from worthless securities, keep records for 7 years. There is no restriction on the statute of limitations if you filed a
fraudulent return or didn't file a return at all.
What Records to Keep
Keeping tax records involves more than just filing your tax return. As a business owner, you're responsible for maintaining documentation of all income, expenses, asset purchases, deductions and credits you reported. To support your tax return, keep copies of purchases, expense reports, sales invoices, real estate statements, cancelled checks, bank account statements and credit card statements from that tax year. If you claimed depreciation on assets, retain supporting schedules that show how you calculated depreciation expense.
Other Accounting Records
Your accounting records are another source of support for your tax return. Business tax preparers typically use your general ledger, financial statements, check registers and record of journal entries to prepare your tax return. CPAs recommend you keep these accounting records forever. If you use accounting software, it should automatically save your prior year information. Archive old data and create backups of these electronic records in case your server ever crashes or is damaged.
Category: Personal Finance