If the IRS comes knocking, your documentation is your defense. Without proper records, legitimate deductions get denied, expenses become unverifiable, and a routine inquiry can escalate into a full audit.
The good news is that proper documentation is not complicated. It just requires consistency.
What to Keep
Income Records
Every source of income needs documentation. W-2s and 1099s from employers and clients. Bank statements showing deposits. Sales receipts and invoices. Settlement statements from property sales. This is not optional. The IRS already has copies of your 1099s and W-2s. Your records need to match.Expense Receipts
The IRS requires documentation for every business deduction you claim. For expenses under $75, a bank or credit card statement showing the amount, date, and vendor is generally sufficient. For expenses over $75, you need the actual receipt showing what was purchased.Mileage Logs
If you deduct vehicle expenses, you need contemporaneous mileage records. That means a log maintained at or near the time of each trip showing the date, destination, business purpose, and miles driven. A year-end estimate will not survive an audit.Home Office Records
If you claim a home office deduction, document the square footage of your office space and total home. Keep mortgage interest or rent statements, utility bills, and insurance records that support the deduction calculation.How to Organize
Digital First
Scan or photograph every receipt. Paper fades, gets lost, and takes up space. A digital copy stored in a cloud folder organized by year and category is searchable, backed up, and always accessible.Monthly Processing
Do not wait until year end. Once a month, review and categorize your transactions. Match receipts to expenses. Flag anything that needs follow-up. A 30-minute monthly habit prevents a 30-hour year-end scramble.Separate by Tax Year
Create a folder structure organized by tax year. Within each year, create subfolders for income, expenses by category, bank statements, and tax filings. When tax time arrives, everything your accountant needs is in one place.How Long to Keep Records
The general rule is three years from the date you filed the return. But we recommend seven years for business records. If you underreported income by more than 25%, the IRS has six years to audit you. If fraud is suspected, there is no time limit.
Keep records related to property and assets until seven years after you dispose of the asset. The basis calculations require original purchase documentation.
The Audit Reality
Most audits are correspondence audits where the IRS sends a letter asking for documentation of a specific item. If you have the documentation, you respond with copies and the matter closes. If you do not, a simple inquiry can escalate into something much more expensive and time-consuming.
Good documentation is not about paranoia. It is about preparation.