The COVID-19 extended deadline for taxes has passed. Now, what should you do with the piles of receipts, 1099s, and other tax documents you used to prepare your return? Do you need to keep hard copies or are electronic records sufficient? Here’s a guide for both individuals and businesses to follow for assuring you have appropriate records in place should a tax authority come calling.
Records for Income Tax Returns
Individuals and businesses should generally keep tax records for three years, according to both the Internal Revenue Service and the Georgia Department of Revenue. The IRS requires that you keep receipts, cancelled checks, and other supporting documents for any income, deduction, or credit that appear on your return.
For income reported on your return, the Georgia Association of Accounting and Tax Professionals recommends you keep W-2s, Form 1099s, bank and brokerage statements, and Forms K-1. For expenses, keep sales slips, invoices, receipts, cancelled checks or other proofs of payment, and written communication for donations to qualified charities. Make sure to keep these supporting documents for alimony payments, childcare expenses, mortgage interest, real estate taxes, and any other items you claim as an expense or credit on your return.
If your return includes a claim for loss from worthless securities or a bad debt deduction, you’ll need to keep those records for seven years.
Both the IRS and the Georgia DOR note there is no statute of limitations on fraudulent or unfiled returns, so should you fall in either category you need to keep records indefinitely. If you omit income that amounts to more than 25% of the gross income on your return, you’ll want to keep those records for at least six years.
Employment Tax Records
If you are running a business and have employees, you need to keep records for payroll taxes and other employment tax records for four years, according to the IRS. These records should be easily accessible to the IRS and include:
- Amounts and dates of wage, annuity, and pension paid
- Tips reported
Names, addresses, social security numbers, and occupations of employees
- Dates of employment
- Periods for which employees were paid while absent due to sickness or injury, as well as the amounts paid
- Dates and amounts of tax deposits you made
- Copies of payroll tax returns filed.
Taxpayers and businesses should keep tax records for property sold until at least three years after selling that property and filing corresponding taxes. These records should support the basis you used for computing the gain or loss on the sale of the property. Make sure to keep the purchase contract, mortgage documents, repair and improvement bills, depreciation records, sales contract, and any records related to tenants or leasing.
Records to Retain Indefinitely
While receipts, forms and other documents used for annual tax preparation have specifically recommended periods of retention, there are some records that businesses should retain indefinitely. These include the original EIN letter from the IRS and the S- Corporation acceptance letter (only for S-Corporations). All businesses should also retain any legal documents related to creation of the business entity, such as incorporation documents, partnership agreements, bylaws, etc. Other documents to retain indefinitely include board meeting minutes, and documents related to changes in the ownership of the business.
Paper vs. Hard Copies
Old accounting legend includes tales of shoe boxes full of receipts and statements. Thankfully, taxing authorities no longer require hard copies for back up. Taxpayers can keep electronic records on a desktop, flash drive, or cloud, as long as they are safe and secure. Regardless of the storage method, all tax records need to be legible and readable should the IRS or Georgia DOR make a request.
If you have questions about tax document recordkeeping or other tax issues, contact us today. We’re here to help!
Bill Lincoln brings over 20 years of CPA and leadership experience to the BJM team. A native of Pittsburgh, Bill relocated to Atlanta in 2012. After several years of working for larger firms, Bill was introduced to BJM president Neal Bach. As a Tax Manager, Bill is responsible for reviewing tax returns and other client deliverables, developing the team, and enhancing operating procedures.