Tax Records: What to Keep, and For How Long?

CWA FINANCIAL PLANNER (AND FORMER IRS EMPLOYEE) KELLEE HARRIGAN SAYS DON’T SKIMP ON DOCUMENTATION

CWA tax professionals are often asked how long clients should keep tax records, which sounds like a simple enough question. But it’s not so straightforward when it comes to busy dental professionals and their practices. How do new IRS business and personal tax regulations affect you? Are you documenting gains or losses on personal real estate, or practice equipment purchases? The answer to “how long to keep” can vary depending on a multitude of factors.

Working at the IRS

“As an agent in the Large Business Investigation division of the IRS, I helped build pilot programs for IRS agents to collaborate with large businesses during the audit process,” CWA Financial Planner Kellee Harrigan said. “I also witnessed relatively painless audits, when business owners had the proper documentation in their tax records to support their claims and deductions. Although most CWA-client practices would be audited by the IRS Small Business Investigation division, that key principle – keep organized with thorough documentation – can help you avoid the same audit headaches.”

A good rule of thumb

The standard rule of thumb for your personal and business tax records: Keep everything from the past five years. However, to maximize your yearly returns you may need to keep some records longer. For example, Harrigan recommends:

– For business returns, keeping all records for equipment purchases from the initial date of purchase, for as long as your practice owns the equipment. If you sell the equipment, even after five years, you will need accurate records to maximize deduction(s) or account for gains.
– For personal returns, keeping all records for stocks and bonds, from initial date of purchase, for as long as you own the stocks or bonds. Again, even after five years, you will need accurate records to maximize personal deduction(s) or account for gains.

Kristina Yarbrough CPA, the Director of Tax Services at CWA, concurs. “I always recommend people keep a copy of their actual tax return indefinitely. Do not rely on anyone else to keep copies of your returns. Most professionals do not keep records of their past clients after seven years.”

Some IRS recommendations

The IRS recommends keeping all tax returns and support documentation for a minimum of three years, but keeping some for up to seven years. Some guidelines from the feds:

– Keep real estate-related records indefinitely, for as long as you own the property. You will need them to accurately figure depreciation, amortization or depletion deductions, and to accurate figure the gain or loss when you sell or dispose of the property.
– Keep records for seven years if you file a claim for loss from securities, or write off “bad” debt.
– Keep records for seven years if you think you may need to file an amended business or personal return in the future.
– Keep employment tax records for at least four years after the date that the tax becomes due or is paid (whichever is later).

Documentation for your practice

Along with making any possible audits smoother, thorough documentation ensures your practice and personal returns have maximized deductions and credits to keep your tax bills as low as possible.

Harrigan also recommends making sure your practice does not overlook these areas when it comes to tax records:

– If your practice reimburses employees for expenses, be sure employees fill out every reimbursement form in detail, and keep all the forms by calendar year along with all the receipts submitted.
– If your practice offers employee flexible spending accounts as a benefit, be sure to keep all the documentation and receipts for those reimbursements also, again by calendar year.

Surviving an audit

Yarbrough’s CWA Tax Services teams work with more than 1,000 CWA clients on tax preparation services for federal and U.S. state returns, along with other services. Throughout her career of defending clients who are audited, she said successful results depended on good record keeping.

“Most taxpayers who are audited end up paying something due to not having the proper documentation to back up deductions on a tax return,” Yarbrough said.

Working together, it is important for CWA clients and Tax Services professionals to take the time to get deductions and paperwork in order every year when filing, for smooth sailing if an audit does occur.

“For the years I have defended audits, there has not been a CWA client that has lost a deduction due to a CWA tax stance,” Yarbrough said. “The biggest takeaway is the taxpayer is responsible for keeping their records accurately. Failure to do that is the No. 1 reason someone would ever owe in an audit.”

Storage and digitization

Digitizing usually consists of scanning all relevant paper documents, then organizing and storing the digital files via an online service, on a CD, on a USB drive or on a computer. For more on the advantages and disadvantages of different types of electronic record storage, see this article on Bankrate.com.

When deciding whether to digitize your practice or personal tax records, factor in the costs vs the benefits for your unique circumstances. If you are considering digitizing your practice tax records, Harrigan suggests reviewing these important questions with your staff :

– What are our current costs of physical storage, including off-site storage fees?
– What benefits could we gain by freeing up physical storage space, off site or on site?
– How long will it take – and how much will it cost – to scan, organize and digitally file our records?
– What is our plan for the safe disposal of paper records once they are digitized (usually via shredding)?
– How will we keep our electronic documents secure and ensure they are properly backed up?

Your CWA Advisor Can Help

For specific questions on keeping and organizing your tax records, Harrigan and Yarbrough encourage clients to consult their CWA advisor. Together you can stay organized, minimize your personal and professional tax liabilities, and plan for a prosperous financial future.