There's no time like the present to start getting your paperwork in order for next year's tax season.
Record keeping can be a burdensome task -- it's boring and time-consuming. And storage of records takes up space. But knowing what records to keep and for how long can save you problems down the road.
Income tax returns. Conventional wisdom says to keep copies of income tax returns for a minimum of three years (the time during which a return can be audited). However, if the IRS suspects fraud or if it believes no return has been filed, then there is no limit on the number of years it can go back for examination. Better idea: Keep copies of tax returns indefinitely, along with proof of mailing, in order to have evidence that the returns were filed.
Information needed to prepare returns. Retain records you need to prepare tax returns. The type of records to keep and how long to keep them depend on the items involved:
Asset purchases. Keep records relating to the cost of property still owned (and for at least three years after sale). These records are needed to figure the basis of property used for determining gain or loss upon a sale. Examples: Confirmations of securities purchases, sales receipts for equipment purchases, and closing statements for real estate acquisitions.
Car expenses. Keep records relating to a car used for business for at least three years from the filing of the return. Examples: Diary or logbook, receipts, credit card slips.
Meal, entertainment, and travel expenses. Keep records relating to business meals and entertainment for at least three years from the filing of the return. Examples: Diary or logbook, expense account records, restaurant receipts, canceled checks. Note: You don't need receipts of expenses (other than lodging) costing $75 or less.
Employees. Special record keeping applies for businesses with employees. Keep records relating to employees for at least four years. These records include:
Employee information (name, address, Social Security number, dates of employment)
Dates and amounts of all payments to employees (wages, pensions, sick pay, fringe benefits, etc.)
Time slips or other records of employment
Withholding allowance certificates (W-4 forms)
Copies of Form W-2 returned to you as undeliverable
Copies of employment tax returns
For more information about record keeping, see IRS Publication 15, Circular E, Employer's Tax Guide, and IRS Publication 583, Starting a Business and Keeping Records, both of which can be downloaded from www.irs.gov.