Are You Up to Par with Tax Return Documentation Standards?

Every year around this time, CPAs usually receive many questions regarding records retention. For those who share these concerns, below is a quick summary you can use for reference. When concerned with what the requirements are for maintaining records in support of a tax return, it’s a good idea to consult the entity that will want them later: the IRS. Here are its standards:

  1. If you owe additional tax and situations (2), (3), and (4) below don’t apply to you, keep records for three years.
  2. If you don’t report income that you should, and it’s more than 25% of the gross income shown on your return; keep records for six years.
  3. If you file a fraudulent return; keep records indefinitely.
  4. If you don’t file a return; keep records indefinitely.
  5. If you file a claim for credit or refund after you file your return; keep records for three years from the date you filed your original return, or two years from the date you paid the tax, whichever is later.
  6. If you file a claim for a loss from worthless securities or bad debt deduction; keep records for seven years.
  7. Keep all employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later.

A quick side note: IRS increased enforcement may have made your CPA seem less-forgiving this year when it came to proper documentation on your part. He or she was obligated to prepare your return to withstand an IRS examination, and audits overall have become more exacting.

Generally, you’ll hear that four years is a safe period to maintain records, as that would be approximately three years after the end of any timely-filed tax return—assuming the return is prepared correctly, so your CPA doesn’t need to defend you under items 2, 3 or 4!

Regarding what’s required to be kept, as long as your recordkeeping system is sufficient to prove the income and deductions reported on your tax return, it’s your discretion. Your files can be written or electronic, but must include a record of each transaction on your return and be organized and accessed relatively easily. Standards for digital records can be found on the IRS website.

If you’re required to prepare an expense report for an employer, the burden of proof shifts to the employer for what’s reimbursed, so he or she may take possession of your receipts. Several apps for smart phones are also available to keep these records and are fine as long as your files are easily recoverable if necessary.

In addition, some expense items will receive more scrutiny than others, as they’re more easily “estimated” than others. Most of these areas include provisions for standard amounts for simplicity, but even using those standards require proper accounting. Contact your CPA for clarification on these expenses and if any of the information above is confusing. As always, better to be safe than sorry when complying with IRS rules.

Mark Patrick is a partner at Patrick & Robinson CPAs in Jacksonville. He can be reached at (904) 396-5400 or