We have seen an increase in sales tax audits over the past three years and the IRS is increasing its audits. The number one reason why people end up paying their hard earned money to the IRS after an audit is lack of documentation. Many people don't save their important tax records so they cannot prove what has been placed on their tax return.
So how long should I save my important records?
Yes, it's best to stick with the seven years rule whether you have 20 employees or a sole proprietorship running everything through your personal tax return because:
- The IRS is permitted to reexamine your taxes going three years back (measured from the time you filed the income tax return) - if they discover or strongly suspect something incorrect, they are then entitled to go back six years and ask for you to provide proof of all monetary items.
- If you file a claim for a loss from securities or bad debt, the IRS has the right to request you to show proof, going back seven years.
- If you accidently or mistakenly understate income by an amount which is more than 25% of the gross income shown on your return, you'll need to provide proof for six years back from the time you either filed or paid, whichever is later.
- However, if you file a fraudulent return (or failed to file a return at all), there is no limit to the number of years you may be asked to go back!
- Sales Tax audits usually go back four years.
So, what needs saving?
Unfortunately, just about everything. More small businesses are being targeted by the IRS now, so you'll need to provide the IRS auditors with a record of everything or risk paying penalties. Cancelled checks, credit card statements, receipts and anything you've included on your tax return should be saved.
Scanning and shredding your paper documents will save money and give back valuable office space. Just be sure you keep them backed up with a secure & reliable "cloud" service. We have been paperless for 7 years and I am glad we don't have all of those files to keep track of.
This weekend we are having our after tax season party. I am looking forward to relaxing with all of the wonderful employees and their spouses to celebrate the end of tax season. Actually, for us, it is not the end of tax season as we still have many tax returns to complete. We also have new clients starting up with us and a new employee starts next week.