Record Keeping

RECORDKEEPING FOR INDIVIDUALS

Why keep records?

There are many reasons to keep records. In addition to tax purposes, you may need to keep records for insurance purposes or for getting a loan. Good records will help you:

Ø Identify sources of income. You may receive money or property from a variety of sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness income and taxable from nontaxable income.

Ø Keep track of expenses. You may forget an expense unless you record it when it occurs. You can use your records to identify expenses for which you can claim a deduction. This will help you determine if you can itemize deductions on your tax return.

Ø Keep track of the basis of property. You need to keep records that show the basis of property. This includes the original cost or other basis of the property and any improvements you made.

Ø Support items reported on tax returns. You must keep records in case the IRS has a question about an item on your return. If the IRS examines your tax return, you many be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you many have to spend time getting statements and receipts form various sources. If you cannot produce the correct documents, you have to pay additional tax and be subject to penalties.

How long to keep records.

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.

Keeping records for nontax purposes. When your records are no longer needed for tax purposes, do not disgard them until you check to see if they should be kept longer for other purposes. Your insurance company or creditors may require you to keep certain records longer than the IRS does. Review the guidelines for record retention for individuals.

RECORD RETENTION PERIOD FOR INDIVIDUAL RECORDS

RECORD	RETENTION PERIOD
Form 1099’S	7 Years after receipt
Alimony, custody & prenuptial agreements	Permanent
Bank statements and deposit slips	7 Years
Birth and death certificates	Permanent
Cancelled checks and supporting tax deductions	7 Years
Certificates of deposit statements	7 Years after maturity
Charitable contribution documentation	7 Years
Credit card statements	7 Years
Dividend reinvestment records	Life of ownership + 7 Years
Divorce documents	Permanent
Estate planning documents	Permanent
Financial assets	Permanent
Home improvement receipts and cancelled checks	Life of ownership + 7 Years
Home purchase documents	Life of ownership + 7 Years
Home repair receipts and cancelled checks	Warranty period for item
Insurance policies	Life of policy + 6 Years
Investment property purchase documents	Ownership period + 7 years
Investment purchase and sales slips	Ownership period + 7 years
IRA annual reports	Permanent
IRA nondeductible & deductible contributions (Form 8606)	Permanent
Keogh statements	7 Years after Keogh Termination
Loans records	Term of loan + 7 Years
Medical bills	7 Years
Military bills	Permanent
Mutual fund annual statements	Life of ownership + 7 Years
Receipts, diaries, logs pertaining to tax return	7 Years
Retirement plan annual reports	Permanent
Schedule K-1’s from LLP’s or Corp’s	7 Years after deposition of interest
Tax returns (uncomplicated)	7 Years
Tax returns (all others)	Permanent
W-2’s	Permanent
Wills and trust agreements	Permanent
Year-end brokerage statements	Life of ownership + 7 Years

Note: This chart may be used as a guideline for most records however, always be sure to check local and state record retention requirements.

Record Keeping for Businesses

In business, good recordkeeping is essential not for tax reporting purposes but also for the success of the company. Good records will help you do the following:

Ø Monitor the progress of your business. You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changed you need to make. Good records can increase the likelihood of business success.

Ø Prepare your financial statements. You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors.

Ø Identify source of receipts. You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from nonbusiness receipts and taxable from nontaxable.

Ø Keep track of deductible expenses. You may forget expenses when you prepare your tax return unless you record them when they occur.

Ø Prepare your tax returns. You need good records to prepare your tax return. These records must support income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statements.

Ø Support items reported on you tax returns. You muse keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.

How long to keep records.

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Federal returns can be audited for up to three years after the date of filing (six years if underreported income is involved), so all records substantiating tax deductions should be kept at least that long. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.

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.

When your records are no longer needed for tax purposes, do not disgard them until you check to see if they should be kept longer for other purposes.

RECORD RETENTION PERIOD FOR CORPORATE RECORDS

RECORD

RETENTION PERIOD

Board minutes

Permanent

Bylaws

Permanent

Buy – sell agreements

Permanent

Business licenses

Permanent

Contract and leases

Permanent

Contracts

Life of ownership + 4 Years

Insurance policies

Life of ownership + 3 Years

Insurance records, current accident reports, claims

Permanent

Lease/Mortgages

Permanent

Legal correspondences

Permanent

Patents/trademarks

Permanent

Partnership agreements

Permanent

Shareholder records

Permanent

Stock registers, transactions, certificate, and ledgers

Permanent

RECORD RETENTION PERIOD FOR EMPLOYEE RECORDS

RECORD

RETENTION PERIOD

Accrual reports

Permanent

Allocation and compliance testing

Permanent

Assignments & garnishments

7 Years

Benefit plans

Permanent

Employee files (ex-employees)

7 Years or statue of limitations

Employment applications

3 Years

Employment taxes

7 Years

Financial statements

Permanent

General ledger and journals

7 Years

Form 5500 & W’4’s

7 Years

Internal Revenue Service/Dept. of Labor Correspondences

Permanent

Payroll records and reports

7 Years

Pension/profit sharing plans

Permanent

Plan and trust agreements

Permanent

Savings bond registration records of employees

7 Years

Time cards

7 Years

RECORD RETENTION PERIOD FOR REAL PROPERTY RECORDS

RECORD

RETENTION PERIOD

Construction records

Permanent

Leasehold improvements

Permanent

Lease payment records

Life of ownership + 4 Years

Real estate purchases

Permanent

Note: These charts may be used as a guideline for most records however, always be sure to check local and state record retention requirements.