IRS Record Retention

Updated July 8, 2015
How long am I required to retain my records?
I’m being audited by the IRS and don’t have my source documents. What do I do?
In what form should I maintain my records?
IRS record retention is a touchy subject. Proper documentation under IRS rules can be almost impossible, but it is your only salvation in the event of an audit. As technology has moved forward, its seems like Federal and State rulings have moved backwards. So let’s start with the easy questions…
How long must I keep my records at the Federal level? That depends, but the general rule is seven years. If they can prove fraud, then they can go back as far as they want. At the State of Illinois level, the general rule is nine years.
If you are being audited and don’t have all of your source documents, you better go and find them. Call up the bank and get copies of your bank statements and cancelled checks. Call up your credit card company and get copies of your statements. Same thing with payroll. If you have a payroll service, they will get you copies. If you did your own payroll, then you can fill out a form, and get copies of the returns from any of the taxation agencies.
Inventory if you have one, can be a problem. If they are auditing an income tax return from three years ago, and you haven’t documented you inventory properly, what are you going to do now? What about your Sales? If you didn’t keep copies of all of your invoices, register receipts, and/or sales journals how are you going to prove that your sales weren’t actually twice what they were? Its your job to prove your innocence. Not theirs. If your petty cash receipts have been lost, you will probably get all of those expenses disallowed.
Record keeping is not about entering your transactions into a copy of Quickbooks. Record keeping is about keeping records.
How must these records be kept?
In their original format. The original paper receipt or document is evidence. A scanned copy of that receipt could have been altered in some desktop publishing software. As such I have seen instances where electronic copies of receipts were disallowed as being non-evidential. As technology has moved forward, tax law and the IRS record retention rules have moved backwards. Why? Because people are trying to dupe the agencies with manufactured evidence. Keep your records in their original format. Whether you can read them or not, keep them.
If you are having problems with your IRS record retention rules or have other dilemmas with your accounting, we would love to help. I love hearing from my readers, and can be contacted at
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.