Avoid IRS Audits by Being Organized

How to Keep Good Business Records

If you run your own business and write-off expenses on your tax returns, then keeping good records is a must.

Taxes are a big reason why we keep our business records organized: they help us prepare our returns, separate taxable and non-taxable income and support itemized deductions.

In fact, it’s business owners who have the burden of proof when it comes to verifying deductions on business tax returns. Keeping adequate business records helps to avoid problems down the road.

What type of business you’re in determines what type of records you’ll need to keep for the IRS. All businesses should keep records for:

  • Gross receipts: This is the income you receive from your business. These documents include cash register tapes, invoices, 1099-Misc forms, receipt books, bank deposit slips and credit card charge slips.
  • Purchases: These include documents for items you buy and sell to customers. If you’re a manufacturer, this includes the cost of raw materials or parts that are converted into finished products. These documents include invoices and credit card sales slips.
  • Expenses: Expenses are your costs (not purchases) to carry on your business. Expense documents include account statements, credit card sales slips, invoices and petty cash slips for small cash payments.
  • Entertainment, travel, transportation and gift expenses: If you deduct any of these, save all the related documents so you can verify them.
  • Assets: Asset documents include receipts, invoices and real estate closing statements. You’ll need these documents to determine the annual depreciation for your assets, like machinery and furniture that you own and use in your business.
  • Employment: Keep all your employment records for at least four years.

Keep all of these records for four years. If you’ve filed fraudulent returns or if you’ve gone a year or two without filing, keep them indefinitely. Having a complete set of records will help expedite an IRS audit if your business is subject to one.

You may not keep records showing how much back tax debt you have, but the IRS probably does. And if they’re not, they’ll audit you to find out the principle and add the appropriate interest and penalties. A tax attorney can help you organize your business records and possibly avoid an IRS levy on your business’s assets, which is one record worth avoiding.

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