Documents You Must Keep for Tax Purposes

It’s critical for your organization to keep accurate tax records and maintain a good recordkeeping system. This way, you can respond to an IRS audit or prove compliance with various laws should it become necessary.

However, you don’t have to retain every paper document or electronic file that crosses your desk. The IRS requires organizations to keep certain essential documents on file. These records back up accounting entries, reported taxable income, expenses and deductions.

For example, you must keep documents that support:

Gross receipts, or the total income that your organization receives during the year. Records should show the amounts and sources.

Purchases and expenses that your organization needs to carry on its programs, including any items resold to customers or members. These records also help your nonprofit determine year-end inventory value.

Assets, including investments, buildings and furniture that your organization owns and uses in its tax-exempt activities. You need records for tax purposes and other reasons listed below.

Supporting Assets

When compiling documents on your nonprofit’s assets, keep records about:

• How and when assets were acquired,
• Any debt used to buy them,
• Purchase prices,
• Cost of any improvements,
• Depreciation deductions,
• Deductions for casualty losses (if any),
• How assets were used,
• When and how assets were sold,
• Sale price and sale expenses.

Employment tax records, including information about pension payments, wages paid, tax deposits paid, as well as employees’ names, addresses, Social Security numbers and dates of employment. You also must keep copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).

The law generally doesn’t require a special kind of recordkeeping system. You can choose any system suited to your organization’s activities that clearly shows income and expenses. An easy way to organize documents is by year and type of income or expense.

The documents that can be used as supporting evidence varies, but generally include:

• Cash register tapes,
• Bank deposit slips,
• Receipt books,
• Invoices,
• Credit card charge slips,
• Canceled checks,
• Account statements, and
• Petty cash slips for small cash payments

Once records are collected, organized and filed, how long should you keep them? For IRS purposes, you must keep records for as long as you’re able to amend a tax return or claim a refund, or as long as the IRS can assess additional tax. This statute of limitations is commonly three years after the date a return is due or filed, whichever is later.

However, some records need to be kept longer. For example:

Permanent records. These include your application for tax-exempt status, the letter granting the status and the organizing documents, such as articles of incorporation, by-laws and amendments.

Employment tax records. Retain these records for at least four years after the date the tax becomes due or is paid, whichever is later.

Records for non-tax purposes. Even after the IRS time frames elapse, keep some records until they’re no longer required for grantors, insurance companies, creditors or state agencies.

For more information on recordkeeping, consult with your tax advisor.

Copyright 2023

This article appeared in Walz Group’s August 28, 2023 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.