It’s been said that nothing is certain except death and taxes, and the Internal Revenue Service (IRS) is said to be unforgiving, so keep your records. The IRS is a tough foe to battle, so once you’ve filed your taxes, you better make sure you have all your accounting straight in the (highly unlikely) event of an audit. Even though the IRS has set a statute of limitations on how far back they can claw into your financials, it’s best for all parties concerned to save tax records and other financial records for longer than the IRS recommends you do.
The Basics of Business Tax Records
Your business tax records are all the supporting documentation that is submitted to the Internal Revenue Service (IRS) (as well as the state, county and local government tax agencies, if applicable) that pertain to your company’s taxes. This includes receipts of several types (including sales and invoices), banking records, purchases and other expenses, assets and any type of tax records. That includes filings, any employee taxes, sales taxes collected and paid and property taxes. In short, if it’s a financial record that pertains to your business, it’s most likely part of your tax records.
Why Should You Keep Tax Records?
The IRS requires that you keep adequate records of all your company’s financials, as most of this is referenced in some manner in your tax filings. This includes income and sales, expenditures, deductions, capital gains and other taxes paid (state and local taxes, mostly). The idea is to be able to back up any deductions you claimed on your filed taxes in the event of an audit. It’s also best to know how long to keep records, which is covered below.
What Is a Tax Audit?
A tax audit is an exam of your filed taxes by the agency you filed them with. In most instances, it’s the federal tax agency (IRS) that demands an audit, but it can certainly be instigated by the state or local agency as well. It’s a deep dive into the tax return and accompanying documentation, mainly to verify information or look for fraud in the return, particularly if any irregularities are found. Simply put, an audit is usually to verify that the information your company submitted to the IRS is accurate. Of course, you will quite possibly need to produce the documents that back up the numbers you submitted on the tax return.
Understand that any type of tax audit is serious business, and there are stiff penalties for those who flout the rules. Instances of non-compliance include the following:
- Avoidance of record-keeping
- Hiding or non-reporting of income and assets
- Destroying documentation
- Lying to IRS agents during an investigation
- Claiming false deductions
How Long To Keep Tax Records
How long to keep tax records is a common question. The IRS recommends that tax records should be retained for at least three years. In certain instances, some claims can be modified up to seven years after the filing date, so seven years should be your benchmark. However, in the case of businesses, tax records should be kept for longer than the minimum, perhaps indefinitely, because they may need to be accessed later, in situations of a sale, acquisition or other financial need. Because of that requirement, a secure yet accessible option is needed to store these records. One of the most popular options is the use of a virtual data room (VDR).
A Virtual Data Room for Holding Important Records
A VDR is a secure online repository for sharing and storing documents. Although it’s typically utilized during the due diligence phase in a merger and acquisition (M&A) deal, it is also used in other instances, such as retaining financial records for businesses. One of the benefits of using a VDR for tax and financial documentation (besides the security, of course) is its ability to allow multiple users to access documents simultaneously. Far more secure and cost-effective than hosting physical documentation, there is always an audit log trail and safeguards that prevent non-sanctioned access (More on that below).
What to Look for in a VDR
Virtual Data Rooms are widely used in all sorts of industries (banking, litigation, corporate, biotech/pharma, among others), and as long as you need to retain information — including tax and financial records — securely behind a firewall, you’re a candidate for a VDR. There are many things to look for and expect, and these include the following.
- Security: This includes encryption, multiple backups and digital rights management (DRM) that allows admins to control and manage access, along with watermark capability, which indicates what files users have accessed, edited and downloaded.
- Control: Being able to control who has access to certain documents and change permissions on the fly, along with setting an expiration date on access to certain files is a critical control to have in place.
- Ease of use: Of course, you’ll want to choose a VDR that has ease of use. Being able to access the VDR with virtually any type of computer, tablet or smartphone is key, as well as ease-of-use for the admins, as far as setting permissions and file organization is concerned.
Why CapLinked Is the Hero
CapLinked, an industry leader in the VDR space, delivers secure VDRs for any company looking to store financial and tax data safely and securely. Its virtual data rooms offer all the security features and functionality required, including secure access, enterprise-level encryption, multiple layers of security and version control. Its user-friendly interface allows easy uploading and editing of documents and is compatible with virtually every operating system. To see how CapLinked can help protect your tax records and other financial documentation, start a free trial.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Internal Revenue Service (IRS) – What kind of records should I keep
TaxCure – Tax Fraud Penalties & IRS Income Taxes
NerdWallet – How Long to Keep Business Tax Records