If you’re a business owner, you probably have formal procedures in place for keeping records of business-related expenses and payments. Bonus points if you even have a record retention policy that outlines when certain documents can be purged from your files and destroyed. Many owners, however, aren’t always so diligent about hanging on to their receipts and records. And even if they do, they aren’t really sure how long they should keep them.
From atop my grey-haired throne, I have seen many instances of receipts that have either been misplaced or discarded and many, especially younger folks who are new to the practice of recordkeeping, are guilty of poor receipt management.
I can think of two situations that particularly highlight why you may want to consider keeping your receipts for at least three years – which is the period of time your tax return is open and can be recalled by the IRS.
Your Word Against Theirs
A taxpayer and business owner who had taken a casualty loss deduction on his property found himself as the subject of an audit by the IRS. Because the property in question was destroyed, the taxpayer didn’t think to keep his copies of invoices that clearly showed how much he had spent on the property prior to its destruction. Unfortunately for the taxpayer, the IRS requires clear documented to support the claimed cost basis of the property before approving the casualty loss deduction. Therefore, this particular case could end badly for the taxpayer if he is unable to locate the original invoices or obtain duplicates obtained from their sources.
In this particular scenario, if the taxpayer would have kept all his records in order throughout the duration of the period of limitations, the IRS would have the validation it needed to allow the deduction.
Don’t Say They Didn’t Warn You
Rea frequently works with landowners who find themselves on the receiving end of oil or gas royalty windfalls and help them monitor their payments to ensure their accuracy and to ensure that the terms of the lease are being observed. To do this, as a starting point of our engagement with the landowner, we request to review their payment stubs. Unfortunately, if they discard or misplace the stub, the landowner may be unable to verify this critical information. In fact, oil and gas producers routinely warn those who receive payments to: “Keep this stub for your records as duplicates will not be provided.”
If you are ever wondering whether or not you should keep a receipt, I have found that it is always better to be safe and stick your payment stubs, invoices, and crumpled-up receipts in a folder – just in case.
Even if you don’t like to keep a lot of paper receipts around the house or office, that doesn’t mean you should just throw them out. Those receipts are actually a lot more valuable than you think. To learn more about how receipts are important to your business, email Rea & Associates.