By Kevan McLaughlin
All businesses should develop and maintain an adequate tax document retention policy. A myriad of reasons exists to do so, including when applying for loans or lines of credit, lease purchases and such. They can also help alleviate much heartache during audits.
The old, standard advice for clients was to keep records for seven years, but several factors of late could make that term longer.
For starters, it doesn’t cost nearly as much to retain documents. Nearly all tax preparers and CPA firms will provide electronic copies back to their business clients, so owners don’t have to purchase extensive storage space to house the boxes of paperwork. Keeping records for more than seven years won’t break any company’s bank. An entire library of tax and supporting documentation can now fit on a tiny piece of plastic.
Second, some tax items will not confine themselves to one year. Take net operating losses, or when a company reports operating expenses on its tax return that exceed revenues. Taxpayers may carry over losses to other years, in some cases for extended periods of time. At times, auditors can call into question a loss from 10-15 years past.
When they do, possessing the documentation will help expedite the process and support the taxpayer’s justification for factoring in the stated losses in subsequent years. Companies should retain records longer than seven years in these instances and many others. Businesses that don’t could find themselves in a very difficult situation.
Being audited can stand out as one of the worst experiences an owner can undergo, and the government possesses tremendous resources to use against taxpayers. An audit could result for any number of reasons but can be far from routine.
Keeping records can make the difference between a favorable and unfavorable outcome. While seven years remains the minimum, most business executives should consider keeping their tax documentation for longer.
As the founder of McLaughlin Legal, San Diego tax attorney Kevan P. McLaughlin focuses his practice on all aspects of Federal and California tax law, with a particular emphasis on representing taxpayers in civil and criminal tax litigation and controversy cases.