Why Maintaining Your Tax Records is Important and How TaxBandits Can Help You?

When it comes to running a business, handling taxes is an inevitable part of the game. One aspect that often gets overlooked but is of importance is maintaining tax records. Not only is it a smart move for future tax filings, but it’s also a requirement set by the IRS. In this blog, we’ll be explaining why maintaining your tax records is crucial and how TaxBandits simplifies the process.

Why Maintain Tax Records?

Keeping good records is very important to your business. Good records will help you do the following:

Tracking Deductible Expenses:

One of the primary reasons for maintaining accurate tax records is to keep track of deductible expenses. Whether you’re a business owner or a W-2 employee, keeping diligent records can help identify expenses that qualify for deductions. For business owners, this means tracking business-related expenses such as supplies, equipment, and travel costs. On the other hand, W-2 employees may overlook potential deductions like medical and dental expenses.

For example, during tax preparation, your tax professional might inquire about your medical and dental expenses. Without proper records, you might miss out on claiming deductions that could significantly impact your tax liability. 

Preparing Tax Returns:

The significance of good records becomes evident during the tax return preparation process. They form the backbone of a well-prepared tax return by providing the necessary support for income, expenses, and credits reported. Tax regulations demand accuracy and completeness in reporting, and thorough record-keeping ensures compliance, reducing the risk of errors in tax returns.

Burden of Proof:

Maintaining tax records also helps in shouldering the burden of proof. In case of discrepancies or challenges from tax authorities, having comprehensive records ensures that taxpayers can substantiate their claims. Without proper documentation, you may find it challenging to substantiate your claims, potentially leading to unfavorable outcomes.

Facing IRS Audits:

One of the nightmares for any taxpayer is facing an IRS audit. If the IRS decides to examine a return and the taxpayer is unable to produce the correct documents, the consequences can be severe. Additional taxes, penalties, and interest fees may be levied, creating a substantial financial burden.

Business owners, in particular, face challenges when filing taxes late or seeking extensions due to delayed bookkeeping. This not only creates unnecessary stress but can also impact the ability to make real-time business decisions. Keeping your tax records up to date ensures that you have the necessary documentation in case of an audit and helps you avoid potential financial consequences.

Maintaining IRS Compliance: Documents and Durations

The IRS’s recommendation to keep records of employment tax documents for at least four years after filing the 4th quarter of the year underscores the long-term benefits of this practice. 

Let’s consider an example: if you are filing Form 941 for the first quarter of 2016, you should keep records for four years after the 4th quarter filing, which means you should keep the tax records until 2021.

So, what are all the tax documents you should keep?

Here are the essential Records to Keep:

1. Employer Identification Number (EIN):

Your EIN is a unique identifier for your business. It’s crucial to have this number documented in your records.

2. Wage, Annuity, and Pension Payments:

Record amounts and dates of all payments made to employees, including wages, annuities, and pension payments.

3. Tips Information:

Keep track of the amount of tips reported to you by your employees and maintain a record of all allocated tips.

4. In-Kind Wages:

Document the fair market value of any in-kind wages provided to employees.

5. Employee Information:

Record names, addresses, social security numbers, and occupations of all employees and recipients.

6. Undeliverable W-2 Copies:

Maintain any employee copies of Form W-2 and W-2c that were returned to you as undeliverable.

7. Dates of Employment:

Keep track of the dates of employment for each employee.

8. Sickness or Injury Payments:

Document periods for which employees were paid while absent due to sickness or injury, along with the amount and weekly rate of payments.

9. Withholding Certificates:

Keep copies of employees’ and recipients’ income tax withholding certificates (Forms W-9, W-4, W-4P, W-4S, and W-4V).

10. Tax Deposits:

Record dates and amounts of tax deposits made, including acknowledgment numbers for deposits made via EFTPS.

11. Returns and Confirmation Numbers:

Maintain copies of returns filed and confirmation numbers for reference.

12. Fringe Benefits and Reimbursements:

Keep records of fringe benefits and expense reimbursements provided to employees, along with substantiation.

13. Documentation for Credits Claimed:

Substantiate any credits claimed by retaining the necessary documentation.

14. Extended Retention (After March 31, 2021):

For specific cases like qualified sick leave wages, qualified family leave wages, and employee retention credits, maintain records for at least 6 years.

15. Deferred Social Security Tax:

Document the amount of any employer or employee share of social security tax deferred and paid for the year 2020.

To learn more about record keeping, visit www.irs.gov.

Well, maintaining these documents can be quite a task for businesses, especially for CPAs who handle large numbers of clients. However, with TaxBandits, you can rest assured that we keep track of your documents for 7 years after your tax returns are accepted by the IRS, Social Security Administration (SSA), and State(s). This feature ensures that your records are easily accessible, whether it’s for audits or employee reference.

Additionally, TaxBandits offers various features such as bulk filing, TIN matching, Schedule filing, and more. Learn more about TaxBandits’ features.

In conclusion, tackling tax records doesn’t have to be a headache. With a bit of organization and the right tools, like TaxBandits, you can navigate the labyrinth of tax compliance with ease. 

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