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You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
The length of time you should keep a document depends on the action, expense, or event the document records. You must keep your records as long as they may be needed to prove the income or deductions on a tax return. The IRS does not have any set record keeping requirements. However, as they must be available to prove items of income and deductions, they have to be kept at least as long as the statute of limitations.
Since the normal statute of limitations for auditing a return is 3 years, and we file anywhere from 3 to 9 or 10 months in the year FOLLOWING the year of the transaction, four years is the minimum amount of time to keep records.
However, if the return omits 25% or more of the gross income, the statute of limitations becomes six years, plus the year of filing, so I usually tell my clients to keep their records MORE THAN 7 years.
The MA CPA Society has put together a good pamphlet on record retention. It can be viewed here:
This pamphlet shows that some items should be kept permanently, while others have a limited retention time. In this day of identity fraud, it is important that the records be properly destroyed when the retention period is over.
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