Why Keep Records? Part 2

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.

Why Keep Records? Part 1

Everyone in business must keep records. Good records will help you do the following.

Monitor the progress of your business. You need good to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.

Prepare your financial statements. You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.

 • An income statement shows the income and expenses of the business for a given period of time.

• A balance sheet shows the assets, liabilities, and business expense.

Identify source of receipts. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from n

Keep track of deductible expenses. You may forget expenses when you prepare your tax return unless you record them when they occur.

Prepare your tax returns. You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statements.

Support items reported on tax returns. You must keep your business records available in the event of an audit by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. Good records will speed up the examination and hopefully save you money.

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You Received an Audit Notice, Now What?

If you are being Audited

One of the quickest ways your day can be ruined is by receiving notice of audit in the mail. An examination is an unplanned event that can inject chaos into your life. After getting over the initial shock you'll have to decide whether to represent yourself or to obtain outside assistance.

Depending on your circumstances, an audit can be confusing and lengthy. Generally, an auditor will review your income versus your deposits or request proof of expenses. Defining how the examination is going to be run and defining issues will help the audit go smoother. Hiring someone who has experience in audits will greatly increase your chances of success.

Don't speak to the Government. 

It is advisable that you do not speak to anyone at the Government, mail any correspondence, complete any forms, or sign any documents no matter how simple or straightforward they may seem. Your statements or actions could have legal significance at a later time.

Who to hire. 

The big question is who to hire. Many factors go into this decision but it comes down to hiring an attorney, accountant or an enrolled agent. I believe that either a CPA or an attorney will give you your best chance at success. Keep in mind that your communications with an accountant are also not subject to the same privilege as those with your attorney. That means that in some cases your accountant can be forced to testify about things you told him in private. Tax attorneys have received advanced training in interpreting the law and generally will provide the best representation when it comes to gray areas of the law.

Speak only to an attorney.

If you want to discuss the facts relating to the audit with tax specialists then it is best to first contact a tax attorney. If you follow this rule your communications with your attorney will remain privileged. You can speak to him or her freely about the facts of your case. Your communication will remain privileged even if you don't end up hiring that attorney.

Act quickly. 

If you receive an audit notice, act reasonably quickly so that you can respond by any dates provided in the notice. You can lose important rights if you don't act on time.

Control over tax returns. 

The preparation of any tax returns that become due during a pending audit should be placed under the control of the attorney handling your audit. This will help your attorney close your exam and will minimize the risk that an audit or other investigation expands to the current year.

You should always consult a tax adviser before implementing any strategy stated in this article. Because many issues involving taxation will involve other areas of law or the courts, an attorney will often be the best professional to protect your interests. If you are in need of help just call Bannon and Associates PC at 1-877-792-3812  for a free consultation.