Just How Important Is A Paper Trail?

All of the income and expenses that your track for your recordkeeping need to be supported with some sort of physical proof such as a receipts, canceled check, bank statement, invoice or credit card transaction slip.

In the event of an audit, the IRS will require you to document your sources of income and be able to prove the expenses you used to reduce your taxes were valid and reasonable for your type of business.

A clear paper trail is what the IRS will be looking for.

If there is any doubt, the IRS has the power to throw out unjustifiable expenses and you will be liable for back taxes, interest and penalties associated with that transaction.

Just how long are you required to keep this documentation?

Although it is recommended that you keep your tax returns and year end financial reports indefinitely, the general rule is ten years for most supporting documentation.

This carefully documented paper trail is certainly helpful in the event of an audit, but it also can help you in the operation of your business.

Your records provide a clear picture of what is happening in your business. It reveals how you are earning money and who the source is. Your records also provide you with an itemized breakdown of how you are spending money and the reason for the expenditure. This insight can prove to be a wonderful management tool and can help you meet your estimated tax liability.

Brigitte A. Thompson, President (WAHM of Sarah 1/93 and Jacob 4/97) DATAMASTER, LLC~

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