It’s a very popular question: how long should a business keep their receipts/records and what constitutes good support?
It’s also a touchy subject. What most of us don’t realize is that “innocent until proven guilty” simply does not apply in the case of a tax return audit. It’s the opposite. When you file your return, you are asserting that you received a certain amount of income, and that a certain amount of that income should not be taxed because of your deductions. If the IRS questions your deductions, it is up to you to substantiate them. Hey I don’t like it any more than you do, but it happens whether you like it or not, and it’s wise to be prepared.
So the short answer is - AT LEAST three years from the time you file your returns - since this is how long the IRS can audit your records and you need to be able to show proof to support your deductions. It’s much better to retain your docs and records for longer than this –ideally six years if you don't want to be disadvantaged if you do happen to come under scrutiny. If tax returns have errors or omissions that appear intentional or high amounts, IRS does have authority to reach back more than three years under certain circumstances. These records can be kept by paper or digitally, but I suggest digitizing them all since receipts have a nasty little habit of fading overtime.
And what constitutes good support? A 3rd party documentation of the transaction is a good start - such as a receipt or even a bank statement in some circumstances.
Whether it’s a receipt or a bank statement - you need to provide the detail the IRS would want to know around that transaction - the who/what/when/where/why. Because of this - receipts will typically work better as support since you will have an itemized breakdown of the transaction in question. And here’s an important point: even having the receipt might not be enough, you might need to provide additional information (like on a meal expense) such as who you were with, and what business was discussed. So to emphasize – a bank statement image showing a check written to a restaurant from your business checking account…does NOT substantiate that meal as a business expense. You still need to be able to show why it was a business meal. Same with purchases at a Target, Wal-Mart, Dollar General, or even Sam’s Club – there is no evidence in a copy of a check to show that a business expense was incurred, whereas a receipt can show all of the details.
It’s a very common theme in tax court cases I read - expenses being disallowed because the taxpayer cannot prove their business use because they have either incomplete or no records. If you want to be able to justify your deductions in an audit, you will need to keep complete and detailed records. The technology we have now gives us options and ways to preserve these things in a convenient, digital format. Check out your records and your practices for holding and organizing your receipts and documents. Take all the deductions you can, don’t pay a penny more in taxes than what you really owe – and be ready to shut down the IRS auditor so you can get back to work.
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