For many taxpayers, the word “audit” alone triggers anxiety and stress. In fact, as this survey reveals, 47% of Americans feel anxious when they receive any correspondence from the IRS, with nearly a third worrying they will be audited despite feeling very confident that their tax returns are error-free.
It’s not hard to understand why. The long and intensive process of undergoing an IRS audit can feel like a nightmare, and you can face penalties, interest, and additional taxes if you fail.
Even if you never experience an audit, inaccuracies or inconsistencies on your tax returns can lead to costly and time-consuming delays or fines.
On the other hand, an accurate and thoroughly-documented tax return can save you time and money — both of which are valuable for individuals and especially critical for business owners.
So what’s the secret to ensuring your ducks are in a row when tax time rolls around?
In this post, we’ll explore what individuals and business owners need to know to make filing their returns more manageable and accurate through smart record-keeping for tax purposes.
For individuals and businesses alike, records of all income and deductions are essential to accurately preparing and submitting tax returns. This includes records of income such as wages, investments, and income from other sources, as well as deductions for expenses or charitable contributions. These records help ensure you are paying the correct amount of taxes, which is the best way to avoid any questions from the IRS. Furthermore, if the IRS or other tax authorities have questions, having these records on hand can make it easier to provide the answers in a timely fashion.
Generally, individuals should keep records and documentation that support what they claim on their tax return for at least three years after filing. These should include records of:
Meanwhile, businesses should also keep detailed records of all transactions. Some, such as purchases, sales, payroll, and other transactions, will generate supporting documents like sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents should be preserved, even if you have entered the information they contain into your books, as they support those entries (not to mention your tax filings).
Additionally, businesses with employees must keep employment records available for IRS review for at least four years after filing the 4th quarter of the year. These include your employer identification number (EIN), records of wages, tips, employee information, benefits, and more.
Finally, businesses should also keep track of assets — the property, such as machinery and furniture, that you own and use in your business. If you sell the assets, you’ll also need records to compute the annual depreciation and gain or loss on the assets sold.
In short, not usually — but there are exceptions. Under normal circumstances, the IRS can include returns filed in the last three years in an audit and tries to conduct an audit as soon as possible after the return in question is filed. Accordingly, most audits are conducted on tax returns filed within the preceding two years. That said, if they identify a substantial error, the IRS may choose to extend the audit window further back — usually, they will not go back further than six years.
(If you are audited — don’t panic. Here are some steps you can take right away to prepare to navigate the process with confidence.)
For business owners, there are some additional requirements for employee records, including some that must be maintained for long periods or permanently.
For example, while it’s a good idea to keep any records for at least three years, and payroll and benefits information should be kept for seven, you should also keep records such as these for at least ten years:
Records which you should save permanently include:
Many individual taxpayers often wonder whether they need to save their receipts for their taxes. The short answer is: If you want to use them to claim an itemized deduction or credit…then yes!
Although it can be tedious, saving receipts for deductible expenses like business dinners are the best way to document such expenses — especially if the receipt is the only proof of purchase.
Regarding groceries, the IRS generally does not allow individuals to write off food items. Even if you are self-employed, the IRS is unlikely to consider your groceries an ordinary expense directly related to your work (and therefore tax-deductible). However, some freelance professionals, such as AirBnB hosts or food bloggers, may be able to deduct food expenses. If you are a food vendor or restaurant owner, groceries may also be a business expense.
As mentioned above, any important tax record should be kept for a minimum of three years. In some uncommon circumstances, the IRS may require it for extended periods after filing the return. Additionally, records related to assets, real estate, stocks, or other investments should be kept indefinitely.
Once the applicable statute of limitations runs out, it is usually safe to eliminate certain records that are no longer needed. If a return is four years or older, you are likely in the clear to get rid of supporting documents such as receipts — but hold on to the return itself, as well as the IRS confirmation.
Of course, the effectiveness of all the record-keeping discussed above relies upon one key component: organization!
Organizing your tax documents can be a daunting task, but your record-keeping is only as helpful as your ability to find a specific record.
First, you must designate a safe and easy-to-access place to keep all your records orderly. This could be a file cabinet, shelf, or even a folder, depending on the extent of your record-keeping need. Next, it is essential to group documents according to categories, such as by year and type of income or expense. Additionally, you should keep last year’s tax return handy.
As you can likely imagine, digitizing your records has numerous benefits — especially if you run a business or have complex personal taxes requiring a lot of supporting documentation. Digital record-keeping can be more secure and can be backed up to multiple locations. It is also more efficient, as records can be accessed quickly and easily. Finally, digital record-keeping is cost-effective and saves space.
Unsure what kinds of records you should save, how long to save a specific record, or what to do in the event of an audit? Consulting with a tax professional is the best way to get your questions answered — and may help save you money or avoid making costly mistakes when filing your tax returns this year.
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Above & Beyond
New York City
2 West 45th Street, Suite 1208
New York, New York 10036
565 Taxter Road, Suite 105,
Elmsford, New York 10523
Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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