Here are eight tips on what tax records to keep, how to keep them, and how long to keep them: How do you establish proof? Through good record keeping. If you have records substantiating those deductions and expenses, you have satisfied the burden of proof for the IRS. Do not take deductions or claim income without having documentation to supply as proof. The original paper documents should be kept with the ledgers where you recorded the transactions. In case of a fire or other disaster, each source document should be scanned into a computer file and stored on a flash drive. If you use either EFT or credit/debit cards, use the financial statements issued by your bank as source documents. For EFT, the statement must show the amount transferred, payees’ name, and the date the transfer was posted to the account by the financial institution. For credit/debit cards, the statement must show the amount charged, payees name, and transaction date. Proof of payment on its own does not necessarily mean you are entitled to a tax deduction. Keep credit card slips and invoices to substantiate your claim of a deduction. If you have employees, you must keep their records for no less than 4 years. To be safe, keep employee records for at least 7 years. If you owe taxes, keep your records for at least 3 years. If you own property, keep associated records until the period of limitations expires for the year in which you dispose of the property. If you have reportable income but do not report it, and it is more than 25% of the gross income on the tax return, keep your records for at least 6 years.
