Proper record-keeping safeguards tax compliance and supports critical business decisions. IRS Publications 552 and 583 outline specific requirements.
1. What to Keep & How Long
- General rules: Keep supporting tax documents (receipts, invoices, forms) for at least 3 years after filing—files determining basis require retention until 3 years after disposal.
- Extended retention: 6 years needed for underreporting over 25%.
2. Digital vs. Physical Records
- IRS-compliant: Digital images are acceptable if legible and secure .
- Best practice: Organize folders by tax year, with subfolders for “income,” “expenses,” and “asset records.”
3. Software Solutions
- Document syncing: Tools like Dropbox with audit history logs ensure traceability.
- Auto‑attach receipts: Apps like Receipt Bank integrate with accounting systems for expense tracking.
4. Audit-Readiness Practices
- Routine reviews: Quarterly checks prevent missing deductible items.
- Cross-comparison: Ensure scanned records align with physical files.
5. Example: Lily’s Bake Shop
- Old workflow: Paper receipts stuffed in shoeboxes.
- New system: Used QuickBooks + Receipt Bank app to scan and attach every expense.
- Result: Zero IRS audit issues and improved monthly expense visibility.
6. Red Flags to Avoid
- No documentation for high-value cash purchases
- Excessive meal deductions without clear business justification
- Missing asset records, leading to depreciation errors
Conclusion
Structured, compliant record-keeping reduces audit risks and aids in understanding business financial health.
