DIVIDENDS September 2011
Document Retention: What to Keep and How Long
The length of time you should keep records depends on the document, action and expense.
Generally, you should keep your records that support items of income or deductions from a tax return until the period of limitations for that return runs out. The period of limitations is the period of time where you can amend your return to claim a credit or refund, or that the IRS can assess an additional tax.
For records relating to your property, keep until the period of limitation expires for the year in which you dispose of the property in a taxable disposition. These records must be kept to figure any depreciation, amortization or depletion deduction and to figure any gains or losses when you sell or dispose of the property.
Tip: Check with your insurance company or creditors, as they sometimes require you to keep records for a longer period of time.
Examples of recommended document retention schedules:
- Copies of tax returns - Forever
- Tax/legal correspondence - Forever
- Audit reports - Forever
- Contracts/leases - Forever
- Real estate records - Forever
- Bank statements - 6 years
- General ledger & journals - 6 years
- Sales records & journals - 6 years
- Employee expense reports - 3 years
- Personal investment records - 6 years (after sale)
- IRA records - 6 years (after withdrawal)
- Paid vendor invoices - 3 years
- Employee payroll records - 3 years
- Depreciation schedules - Tax life of asset, plus three years
Visit our office to receive a full document retention schedule.
Did You File an Extension?
IRS audits are on the rise.
The likely targets are wealthy taxpayers and big businesses. Other targets include charities and other tax-exempt organizations. Individual taxpayers aren’t in the clear though. The highest rate in a decade, the IRS examined nearly 2 million individual tax returns in 2010.
Significant changes were revealed for taxpayers with total positive income (TPI) between $200,000 and $1 million, businesses with gross receipts of $25,000 and higher and individuals claiming the earned income credit (EIC.)
These tax-exempt organizations will be even more highly scrutinized by the IRS: organizations offering aid on mortgage foreclosures; voluntary employee beneficiary associations; exempt groups with subsidiaries; charities that report high expenses; and labor unions, business leagues and organizations promoting social welfare.
Audits fall into one of two categories – paper audits or personal audits.
Paper audits, or correspondence audits, usually come as a letter from the IRS stating that it has recalculated your tax. The IRS may request that you send additional documents to defend claims you have made. Generally, human error such as transposing numbers, mathematical errors or not properly reporting interest or dividend income that affect personal exemptions are the cause of paper audits.
An IRS representative will come to your home or place of business for a personal audit. These audits are rarely random and are prompted by something on your return that is out of the ordinary.
If you are audited, be organized and have all the information requested to ensure the smoothest audit possible. If you have any questions or concerns, call our office and we can aid you through the audit process.
To prepare for the rise in audits, the IRS has increased its audit staff and has improved its “data matching” program. The focus of these reviews is shifting to compliance issues. The IRS won’t hesitate to penalize those who have broken the rules. The 2010 penalties were assessed to individuals for failure to pay, underpayment of estimated tax and delinquency. Civil penalty assessments were made to business taxpayers for failure to pay or underpayment of estimated tax.
Critical Upcoming Deadlines
Sept. 15: Final deadline to file 2010 calendar year-end tax returns for trusts, corporations, partnerships and LLC
Oct. 15: Individual tax return deadline if an extension was filed