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IRS Record-Keeping Requirements 2025: A Small Business Guide

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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

  1. No documentation for high-value cash purchases
  2. Excessive meal deductions without clear business justification
  3. Missing asset records, leading to depreciation errors

Conclusion
Structured, compliant record-keeping reduces audit risks and aids in understanding business financial health.