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Tax News
 Record keeping requirements

After recent audits of personal income tax returns, we recognize that taxpayers and preparers may not be aware of the rules and regulations pertaining to the requirements of record keeping for expenses and deductions.

Who?

Taxpayers need to be prepared to provide documentation that proves why they claimed what they did on the return. The burden of proof is on the taxpayer. Taxpayers must be able to prove (substantiate) certain elements of expenses to deduct them. Deductions are only allowed if they are ordinary and necessary as determined by IRC Section 162(a) and conforming CR&TC Section 17201.

Why keep good records?

Good records help to prepare and support taxpayer tax return information. Whether it is business or personal, good records help when applying for a loan or for supporting an insurance claim.

Poor or no records result in missed deductions and higher taxes. If audited, poor records can result in underreported income and unsupported deductions, which will result in higher taxes and possible penalties.

What are good records?

Good records support the deduction(s) taken on the tax return. Taxpayers have the right to take every deduction the law allows them. However, we have the right to say "Show me."

What records need to be kept?

Lack of good records show that taxpayers are not following the rules and regulations established by the law (Federal Tax Regulation 1.274-5T). Examples of records needed to support expenses and deductions are:

  • Payment records – Provide either a canceled check or credit card payment to show that payment was made.
  • Invoices  - Along with the proof of payment, provide the invoice cross referencing the business expense.
  • Receipts – Provide receipts that itemize the purchases and/or method of payment.
  • Mileage logs – Keep and provide mileage records during an examination. Federal Tax Regulation 1.274-5T outlines specific requirements for mileage records.
  • Charitable cash or non-cash contributions – Keep records of your donations. IRC Section 170 allows deductible contributions given to qualified exempt organizations.
  • Meals and entertainment – Check Federal Tax Regulation 1.274-5T for guidance on what the taxpayer must provide. For example; there is a meeting with a client to discuss sales opportunities at a local restaurant, generally, the receipt must show the meeting time, the reason for the meeting, and who attended the meeting.

Property/Investments

Basic records enable the taxpayer to determine the basis or adjusted basis of their home. If claiming a carryover loss, then the records need to be kept for as long as there is a carryover balance.

How long should I keep records?

Generally, California's minimum statute of limitations is four years.

The length of time you should keep a document depends on the action, expense, or event.  You must keep your records as long as they may be needed to prove the income or deductions on a tax return until the statute of limitations runs out for that return.

Are there requirements on how to keep the records?

No. In general, taxpayers may choose any record keeping system that suits their personal or business needs and that clearly shows their income and expenses. However, if the taxpayer chooses the "shoebox" method, then the taxpayer will be responsible for assembling and reconciling the records to the tax return.

For small businesses, the business checkbook is the main source of entries. We cannot over emphasize the importance of keeping business accounts separate from personal accounts, so business and personal transactions are not commingled. Computerized software packages are available that require little or no experience in bookkeeping and accounting.

FTB's mission is to collect the proper amount of tax. No more, but no less than your fair share.

References – Internal Revenue Service Publications

Publication 552Recordkeeping for Individuals.
Publication 583Starting a Business and Keeping Records.
Publication 463 Travel, Entertainment, Gifts and Car Expenses.