Though the overall likelihood of an IRS audit remains small, businesses do have a higher risk of raising IRS flags than most individuals. A simple mistake or a sudden change in IRS tax forms might be enough to earn the eye of a tax auditor, and when an audit does strike, businesses have to be prepared to backup all tax claims with documents.
What records are kept, how they are kept, and how long they should be kept can be confusing for businesses. According to the Internal Revenue Service, businesses should keep records as long as those records may be needed. That means keep records as long as they could be required to back up tax claims; in fact, businesses should keep records as long as there is any chance back up could be required for any reason, including legal cases.
The IRS suggests keeping a copy of tax returns and all associated documents for three years. In cases where a business could owe back taxes or has an open tax dispute, the records should be kept for three years following the end of such matters.
Records related to employment, employees and employee pay should be kept on file for at least four years, says the IRS. Some businesses elect to keep such records on file the entire time an employee is with the company and then for four additional years following termination of work.
Businesses don’t have to keep everything on paper, though. The IRS does accept electronic accounting and other records in some cases, though auditors may supplement electronic records with requests for paper documents. Either way, the burden of proof during an audit falls on the business. Understanding how to deal most effectively with an audit can help businesses end tax woes and continue with daily operations.
Source: IRS, “Recordkeeping” Nov. 28, 2014