What are Adequate Records for the IRS?

We know we are going to need great records when we get audited by the IRS. But, just getting our taxes done is such a chore that many of us have simply run out of gas by the time we file our taxes. We are ready to get back to our real work and often skip making sure our documentation is complete and adequately secured. 

Poor record keeping becomes a big problem when the IRS comes calling. How long do you have to keep your tax records? That depends. Below is a summary of the record keeping recommendations given by the IRS. For more details go to https://www.irs.gov/taxtopics/tc305. 

  • 3 Years – Generally, the period of limitations is 3 years from the later of the date you file your return or the date it was due. 
  • No Limit – If you file a fraudulent return or fail to file one, there is no period of limitations. 
  • 6 Years – If you don’t report more than 25% of your gross income, the IRS can go back 6 years. 

What kind of documentation do I need to keep? Another great question. One the IRS has fully covered here. 

Here are a few of the key takeaways:

  • Recordkeeping is Your Responsibility – The burden of proof fully lies on you (and me). The IRS will assume no deduction unless you prove otherwise. 
  • Your records must show the amount of the expense, who was paid and the reason for the expense. Your records must show clear proof of why this is a valid expense. For instance, the credit card statement showing a $500 expenses to the Holiday Inn (or hotel of your choice) does not cut it. Why? The IRS cannot tell what was paid for with that $500. It could have been booze or food. In cases like this, you must show the receipt with the details of the underlying charge. 
  • Travel Expenses – As mentioned above, recording keeping for travel can get tricky. So tricky, the IRS created an entire publication to help us get the recordkeeping right. You can check out the details in IRS Pub 463 here. Table 5-1 gives a great overview of how to substantiate each type of expense. Don’t forget your mileage log! There are details in Pub 463 and you can read more at this blog post I wrote just about mileage logs! (FYI – It can become very expensive if the IRS shows up and you do not have your mileage logs.)
  • The IRS outlines recordkeeping requirements for businesses in Pub 583. This is a good overview of the whys and hows of recordkeeping. 

Overall, you cannot manage what you cannot measure. You must become great at measuring to build a sustainably strong business. While you are measuring, keep your records. You’ll need them in case of an audit and you’ll need them as source documents for your measurement program. 

Disclaimer: This blog is for informational purposes only and is not intended as tax advice. Contact your qualified tax professional for all of your tax questions. 

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