Record Keeping Requirements for Washington State

Good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns.

The law requires businesses to keep complete and adequate records for a period of at least five years. In general, records should be kept that provide:

• The amount of gross receipts and sales from all sources, including barter or exchange transactions.
• Supporting documentation for all deductions, exemptions, or credits claimed.

Other important records to keep include:

• Federal income tax returns
• Washington excise tax returns
• General and subsidiary ledgers
• Sales and/or cash receipts journals
• Sales invoices Purchase/cash disbursement journals
• Purchase invoices for assets and expense items
• Financial statements

Reference: WAC 458-20-254

 
What employment records must the business keep and what rights does the worker have to obtain copies?

• The business must keep records of the worker's name, address, occupation, hours worked on a daily and weekly basis, rate or rates of pay, total wages earned, deductions, and net pay for the pay period. Businesses must keep these records for three years and upon request by the worker, make copies of these records available to them within a reasonable period of time.

Is it legal for a business to make changes to time cards?

• Businesses must pay workers for all hours worked. It is not legal for a supervisor or employer to change a time card if the worker has worked the hours. The supervisor or employer and worker can review the time card and agree that the time recorded was not correct. The law does not require, but L&I recommends that if a change is made, both the worker and supervisor or employer initial the change. It also recommends that the time not be entirely erased but that a line is drawn through it with the change noted next to it.

How long should I keep records according to the IRS?

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

Period of Limitations that apply to income tax returns

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.
7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

• If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should I do with my records for non tax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
 

What is the burden of proof?

• The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.

 
The answer to how long business records should be kept depends a great deal upon whom you ask and what the record pertains to in your business. The IRS sets some basic record retention standards for tax records.  Depending on who you ask; lawyers, accountants, banks and government agencies all seem to have different ideas about how long to retain business records. Depending on your circumstances, both paper and electronic documents need to be considered in your record keeping plans.

It is important to consult with your attorney or tax professional for your specific circumstances regarding record keeping and disposal policies. Be sure to properly destroy or shred business records when appropriate to avoid identity theft and to protect sensitive business information.  

We would be happy to answer any questions about keeping records specific to your business.  Please contact us here.

Resource: The IRS Publication 583, Starting a Business and Keeping Records at http://www.irs.gov/pub/irs-pdf/p583.pdf