When preparing a tax return it is critical to have well organized records in order to help provide answers if your return is selected for examination or if you are asked to prepare a response requested by the IRS. Good records include receipts canceled checks and other documents that support an item of income or deduction or a credit appearing on a return.
- These records must be kept so long as they may become material in the administration of any internal revenue law which generally will be until the period of limitation expires for that return.
- For assessment of the tax you owe this time frame (statute of limitations) is usually three years from the date you filed the return. Returns filed before the due date are treated as filed on the due date.
- There is no time frame to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported and is more than 25% of the gross income shown on the return the time to assess is six years from when the return is filed. For filing a claim for credit or refund the period to make the claim is generally three years from the date the original return was filed or two years from the date the tax was paid whichever is later. For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities the time to make that claim is seven years from when the return was due.
- All employment records for at least four years after the tax becomes due or is paid (whichever is later) must be kept.
- There is no particular formula for the type of bookkeeping you need to use. However you must use a method that clearly and accurately reflects your gross income and expenses. Your records should substantiate your income and your expenses. Publication 583 Starting a Business and Keeping Records and Publication 463 Travel Entertainment Gift and Car Expenses all provide additional information on required documentation for taxpayers with business expenses.
For more information on what records you should be keeping or for a consultation with one of our CPAs contact Lindemeyer today.