Recordkeeping for Small Business/Self Employed Individuals
National Phone Forum presented by Milton Pagan
Small Business/Self Employed Division October 22, 2008
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Basic records required per IRS audit
What We Will Cover
• Necessity of books and records • Definition of books and records • Specific types of records needed
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What We Will Cover
• Maintaining books and records • Basic examination procedures • IRS examination expectations
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Necessity of Books and Records
• Monitor the business’s progress • Prepare financial statements • Track of deductible expenses
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Necessity of Books and Records
• Prepare tax returns • Prepare for an examination • Is this a business?
• Verify expenses • Proof of payment is not enough
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Definition of Books and Records
• Records • Tax purpose of a record • Accounting entry • Accounting book • Income statement • Balance sheet
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UETA Definition of Electronic Books and Records
The Uniform Electronic Transaction Act defines electronic records that, by electronic means, are: • created • generated • sent • communicated • received, or • stored
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Electronic Documentation and the Audit Process
• Records generally accepted by the IRS • General rules when providing electronic records to the IRS • Revenue Procedure 98-25
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Examples of Electronic Reports
• General Ledger • Profit & Loss • Voided/Deleted • Transactions Summary • Transactions Detail • Transaction List by Date • Audit Trail
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Specific Types of Records Needed
Revenue Procedure 98-25 says: “You are not relieved of your responsibility to retain hardcopy records that are created or received in the ordinary course of business as required by existing law and regulations.”
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Recordkeeping requirements
Specific Types of Records Needed
Gross receipts • Cash register tapes • Receipt book • Sales Invoices • Credit charge slips • Forms 1099
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Specific Types of Records Needed
Purchases and expenses Supporting documents should include: • the amount paid • and that the amount was for business purchases
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Specific Types of Records Needed
Travel, transportation, entertainment, gifts • The amount • Each date • The description • An explanation of the business benefit gained
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Charitable contributions
Specific Types of Records Needed: Employment Taxes
You must keep the
• names • addresses and • taxpayer identification numbers • for each individual who works for you, or • performs services and receives payment
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Specific Types of Records Needed
Property used in a business must be substantiated: • maintaining records that show • when and how the property was acquired • the purchase price, and • how the property is used
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Assets
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How to Maintain Good Books and Records
• Use the method that works best • Records should say: • what was received • from whom • for what reason • Keep records timely
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Who is Responsible for the Books and Records
• The taxpayer/business owner is responsible for maintaining adequate books and records • What did the taxpayer prepare? • What was the paid preparer’s role? • The preparer’s records are needed
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Basic Examination Procedures
• Most tax returns are accepted as filed • Three main examinations: • Correspondence • Office examinations • Field examinations
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Basic Examination Procedures
• Where will the examination be conducted? • What records are needed?
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How Long to Keep Them
It depends:
• Three years from the filing date to examine a tax return • Tax records must be kept at least until the statute of limitations expires • Certain tax returns much longer • Source records (checks, receipts, and proof of business purpose) should be kept at least three years
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How Long to Keep Them
It depends:
• • • • • • • • Until the deduction is no longer claimed Employment tax records, four years Assets IRA contributions Brokerage statements Improvements to a residence Net operating losses Not just federal recordkeeping laws
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What to Expect at an IRS Examination
• Avoid delays • Organize the records • Review the tax return • Be prepared for the auditor to test your recordkeeping system • Bring relevant work papers
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What to Expect at an IRS Examination
• Mistakes happen • The taxpayer must be available • Review the year before and the year after • Additional information • MCD will be set by both the examiner and the taxpayer
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IRS Resources
• • • • • • • • • • • • • Publication 15, Circular E - Employers Tax Guide Publication 225, Farmers Tax Guide Publication 463, Travel, Entertainment, Gift, and Car Expenses Publication 535, Business Expenses Publication 536, Net Operating Losses Publication 547, Casualties, Disasters and Thefts Publication 583, Starting a Business and Keeping Records Publication 594, The IRS Collection Process Publication 5, Appeal Rights and Preparation of Protests for Unagreed Cases Circular 230, Publication 3207, The Small Business Resource Guide CD-ROM Publication 1066-C, Virtual Small Business Workshop DVD IRS.gov
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