Burden of proof and record-keeping

The burden of proof

The responsibility to substantiate the entries, deductions and claims on your tax return is called the burden of proof. For the IRS to allow a deduction, you must be able to back it up —usually with adequate records and documentary evidence (receipts, canceled checks, invoices). Extra, more detailed evidence is required for travel, meals, gifts and business use of your vehicle.

Why good records matter

Beyond being a legal requirement, well-organized records let you monitor your business, prepare accurate financial statements, tell taxable from non-taxable income, capture every deductible expense, track the "basis" of your assets, and answer quickly if your return is reviewed.

Your record system

The law doesn't require a specific system —manual or electronic— as long as it clearly reflects your income, expenses, deductions and credits. A good system summarizes transactions (a journal where each transaction is recorded, and a ledger that organizes the totals into accounts). If you use accounting or point-of-sale software, the same rules that apply to paper records apply to electronic ones.

Documents to keep

• Gross income: register tapes, deposit records (cash and credit), receipt books, invoices, Forms 1099 received.
• Purchases and expenses: identify payee, amount, proof of payment, date and a description. Keep canceled checks, receipts, card statements and invoices.
• Business assets: invoices/closing statements showing when and how you acquired them, purchase price, improvements, Section 179 or depreciation claimed, and —on sale— the date, price and selling expenses.

Payroll records

If you have employees, keep all payroll tax records for at least 4 years after the return is due or the tax is paid, whichever is later —EIN; employee names, addresses, SSNs, dates of employment; wages and dates; tips; W-4s; W-2s returned undeliverable; and deposit/filing confirmations.

How long to keep records

Keep property records until the limitation period runs out for the year you dispose of the asset in a taxable transaction. And before you throw anything away, check whether an insurer or creditor requires you to keep it longer.