One question frequently asked by Network Marketing professionals is “How long should I keep my tax returns and tax records?”
The IRS normally has 3 years to audit you and your business, starting from the date you file your return. So, that makes 3 years the absolute minimum period to keep your tax records. However, should your return contain serious tax reporting errors, the IRS can go back 6 years.
State tax agencies can inspect your records too, and their statues of limitations vary. Considering all the laws, my recommendation is to keep your tax records for at least 7 years. This includes not only a copy of the return, but also expense receipts, customer invoices, bank statements, appointment calendars, mileage logs-keep it all!
If space in your ‘home office’ doesn’t permit 7 or more years of record storage, you may want to set up an area of your home for long-term document storage. Areas such as a corner of your basement, attic, or garage work best. I recommend archiving tax returns and records in plastic storage containers, which won’t weaken or be susceptible to moisture over time, unlike cardboard file boxes. Organize the tax records by year, with the most recent in the front. Label each container; this will make it easier to locate files later.
Why all this trouble storing old tax records? Because the day may come-years from now-when an IRS agent asks you for backup documentation to support a tax deduction you’ve claimed. The best way to comply with this request, and at the same time increase the chances for justifying the deduction, is to follow these tips:
• Keep your records for seven years to enable you to prove deductions to which you are legally entitled.
• The burden of proof is on you, not the IRS agent, so be prepared to make your case.
• To the IRS, everything and anything is taxable income… unless it’s on their exception list.
• To the IRS, no expense is a deductible expense, except as the IRS Code addresses the exceptions.
• Keep your records accurate, complete, and up to date.
• Don’t think that the day to day hurdles of growing your network marketing business provide an acceptable excuse for pushing record-keeping to the ‘back burner’
• Obtain and use a business credit card, or designate one or more personal cards exclusively for business use.
• Open a business checking account, exclusively for business use.
Home Business owners should get a copy of IRS Publication 583, “Starting a Business and Keeping Records”, for more details on IRS record-keeping requirements.
Jim Flauaus, President / CEO of Anchor Accounting & Tax, is a Network Marketing / MLM tax specialist. He connects with Home Business owners and Network Marketers across the country and around the world via phone, email, and fax to help them plan and prepare their income tax returns.