Why to keep tax records?
Firstly, keeping tax records is not just applicable to the businesses or CPA firms, but also for individuals. It especially comes into picture when you have to arrange proofs for being a timely tax payer. It also ensures that your claims and deductions are all legitimate.
Good company records help the firms keep a track on various deductible expenses and also completes client’s tax returns, the documentation also will help them identify the different sources of income, preparation of financial statements of businesses or deals and it helps the firms to monitor the progress of the businesses of its clients.
What kind of records are to be kept?
There are several varieties when it comes to types of records.
In case of individual tax payers, there are scenarios wherein a person earns from several sources like main job along with freelance works or part time businesses, it is necessary to have documentation related to these income sources.
Investment income records are critically important so that you are aware of what tax you are owing. Also, your dividends, if any are taxable too.
In case of work and business related investments, the client must have some sort of relevant documentation from the third party.
All the expenses related to the taxes, such as business investments, education expenses, disaster losses, it is necessary to keep documents for them.
How long should the records need to be kept?
Roughly, the records are to be kepts as long as they are needed to prove the deductions or credits related to them.
Typically, some records are to be kept for not more than 2-3 years, but certain records are required to be preserved forever
Here are some specifications to define various time durations for various types of taxes:
- Keep the records for minimum of three years from the date that you have filed the client’s original returns or else for two years from the date that the client has paid the tax, whichever applies later. If the firm files a claim for either the credit or the refund after filing the client’s return.
- Keep the documents for a tenure of six years if the client does not report income that they should be reporting and if it costs more than that of 25 percent of the gross income shown on their returns.
- Keep the records indefinitely if client has not at all filed a return or if client has filed illegitimate returns.
Also, if it is with respect to a business or a company which has employees, keeping those workers’ taxation documents for at least a span of four years after the date that the tax (specially the payroll ones) is paid or may be due.
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