As a business owner, there are many files and paperwork that you want to keep records of for years. While there are many important documents you may have, tax returns and receipts are some of the most important. But how long should you keep tax returns and receipts?
The IRS recommends keeping your tax returns for three years, but some exceptions can extend this period by several years.
How Long Should You Keep Tax Returns and Receipts?
Different documents require you to keep them for longer than the three-year recommendation. However, a general rule of thumb is to maintain a record of all documents for three years at a minimum.
Part of your tax planning should be keeping your returns and receipts if your business is audited.
How Long Should I Keep Tax Returns?
The IRS explicitly mentions keeping your tax returns for three years, but there are special circumstances where you’ll want to keep these records for longer:
- If your tax return includes omitted income, keep your records for six years.
- If worthless securities or bad debt were deducted, keep your records for seven years.
Businesses keep their tax returns for three years due to the Period of Limitations. Since you can amend your tax returns for up to three years, this is the bare minimum that you’ll want to keep your tax records.
The IRS is supposed to perform an audit within a three-year period, but discrepancies can lead to issues with the IRS for seven years.
Many accountants recommend keeping your tax returns and all supporting documentation for seven years just in case.
Circumstances Where the IRS Can Audit a Business Past Three Years
The Supreme Court’s 2012 ruling on U.S. v. Home Concrete & Supply, LLC, 132 S. Ct. 1836 is a prime example of how the IRS, and lawmakers, can change the rules for tax returns. Without going into too much legal jargon and detail, the Supreme Court ruled in favor of Home Concrete and stated that three years was enough time for the IRS to conduct an audit.
Congress overruled the decision and decided to allow six years for overstatements on tax returns.
Under today’s laws, you should keep your tax returns for:
- Six years on overstatement of basis (if a 25% understatement of gross income)
- Six years for understatement of income (if a 25% understatement of gross income)
- Seven years if claiming a bad debt deduction or loss from worthless securities
If you don’t file a tax return or a return is fraudulent, the IRS suggests keeping these documents indefinitely.
Out of an abundance of caution, it’s best to keep your tax returns and all supporting documentation for seven years.
Note: Keep all employee records for four years or more.
How Long Should I Keep Receipts?
Receipts also need to be held to remain tax compliant. Your business’s accountant will work through your receipts to ensure you take all of the available tax deductions. The IRS requires that you keep documentation when you report the following on your tax return:
In fact, you’ll want to keep your bank statements, credit card receipts, deposit information, invoices, canceled checks, payroll information, petty cash slips, 1099 forms, W2 forms, accounts receivable info, accounts payable info, and other receipts that you have.
You have the burden of proof if you’re audited by the IRS to prove your taxes are accurate.
Your business can be audited for up to seven years, so it’s a wise choice to keep all of your receipts for this long.
What Receipts May You Not Need to Keep?
When dealing with small expenses, you can often deduct expenses under $75 without a receipt. There are exceptions to the rule, such as lodging. If you do have these receipts, keeping them is ideal, but if you don’t have them, you can often deduct expenses of less than $75 for:
- Transportation when it’s difficult to receive a receipt
- Lodging or meals under a per diem allowance
However, just because you might not need a receipt doesn’t mean the IRS won’t hound you. The IRS may question any deduction and ask for:
- Specific deduction amount
- Purpose of the expenses
- When the expense was made
- Where the expense was made
The IRS may further scrutinize Meals and entertainment. The IRS can ask who you ate with, what was discussed and more. The IRS wants to ensure that the deduction is genuinely business-related.
Do I Need to Keep Paper Copies of Receipts?
No. The IRS, since 1997, has accepted scanned and digital receipts. However, the IRS requires your digital copies to be:
In short, if the IRS requests a receipt and it’s in a digital format, your business needs to produce the document when necessary.
You should have protocols in place to:
- Keep physical backups of all receipts, or
- Keep backups on the cloud
Digital and physical receipts both suffice for the IRS, but these documents also need to be easily readable. For example, when scanning in a receipt from a restaurant, it should include:
- Name of restaurant
- Phone number
- Total amount
If you’re not careful when scanning your receipts and pertinent information isn’t included in the digital copy, it may be invalid.
You can also keep physical copies at a storage company if you don’t want to spend the time scanning your documents. However, if the documents fade over time, they may not be accepted by the IRS.
When in doubt, keep your tax returns and receipts for seven years. Businesses will have a lot of paperwork and documentation to hold onto, but if the IRS does come along with an audit, you’ll be happy that you kept those records.
If you’re questioning whether you should keep a receipt or document, keep it.
You can digitize the document and have a record just in case of an audit. It’s always better to be safe than sorry when dealing with the IRS.