- Appropriate backup for an A/P voucher package
- Appropriate backup for employee reimbursement and travel expenses
Although rules can differ based on your state and what industry you’re in, the IRS does have some basic guidelines when it comes to record retention. These rules can be found inIRS Publication 583. The IRS requires businesses keep supporting financial documents, which include deposit slips, receipt books and invoices. The IRS requires supporting documents be stored for a specific amount of time depending on the type of expense.
The amount of time records must be kept depends on your business’s tax filing status. If you:
- File a claim for a loss from worthless securities or a bad debt deduction, you must keep records for seven years
- File a claim for credit or tax refund after you’ve already filed, you must keep records for two or three years after tax was paid; whichever is later
- Filed a fraudulent return or did not file at all, you must always keep records
- Recorded too little income on your return and the unreported amount is more than 25 percent of your gross income, you must keep records for six years
- Filed a return and owe additional taxes, you must keep records for three years
As a rule of thumb, businesses are instructed to keep invoices for at least seven years which supports all of the time periods above unless you are aware of a fraudulently filed tax return.
Travel and expense reimbursement records are addressed in Publication 463. There are many rules governing what qualifies as an adequate record. Under an accountable reimbursement plan, employees must provide proof of expense. Adequate proof can be receipts or other documentary evidence listing the date, location and the business reason for the expense. Records of these expenses are to be kept, either written or electronic, for three years. Many companies keep them seven years for consistency with the retention time noted above for invoices.
Documentary evidence (receipts) is needed to support expenses for all cases except the following exceptions:
- The employee was reimbursed using a per diem allowance. While the employee must prove the expenses were business-related, receipts are not needed for tax purposes
- If the expense is less than $75, no receipts are required unless the expense is for lodging.
- Receipts are not needed for transportation costs, for which receipts are not readily available
Record retention is discussed in Publication 583 on page 11, under “Recordkeeping.” The link is: http://www.irs.gov/pub/irs-pdf/p583.pdf
Travel and Expense records are discussed in Publication 463 on page 25, under “Recordkeeping.” The link is: http://www.irs.gov/pub/irs-pdf/p463.pdf
At TAPN in the AP Tools Suite, under the topic "AP Accounting Forms and Checklist Templates", is an example record retention template that follows the IRS guidelines. Click on the link to go directly to the template: http://www.theaccountspayablenetwork.com/html/pafiledb3/pafiledb.php?action=file&id=118&category=5