Part 2
Kinds of Records To Keep. Except in a few cases, the law does not require any specific kind of records. You can choose any record keeping system suited to your business that clearly shows your income and expenses.
You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone and may not give you nessessary data to run your business effectively. The Double-entry system is better because it has built-in checks and balances to assure accuracy and control.
Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place. For example organize them by year and type of income.
How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the statute of limitations for that return runs out. The period of limitations is the period of time in which the IRS can assess additional tax. Generally, this is 3 years from the date of filing or 6 years if income was under reported by 25% or more. If a return is not filed or is fraudulent then the statute does not run against the IRS. Before destroying your records you should consult your tax adviser because special circumstances my require records to be kept beyond the limitation period.
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