Copying and scanning records can be time consuming and, as a busy writer, you don’t want to spend more time backing up files than absolutely necessary. So how far back should you scan or copy records? The IRS can generally go back three tax years in an audit. If there is a substantial understatement of income (25 percent or more), they can go back six years. If there is evidence of fraud or if no return was filed, they can go back as far as they choose. While many CPA firms retain records for six tax years back (seven calendar years), if you believe your past returns were accurate it is probably sufficient to make backup copies of only the last three years’ records. Once you make the backup copies for the past three years, however, you might want to adopt the longer six-year retention period as you move into the future.
What if it’s too late? If disaster has already struck, the only copy of your tax records were ruined, and the IRS hits you with an audit notice, what should you do?
If you hired a professional tax preparer, contact his or her office to obtain a copy of any records that were kept. Some tax pros keep more detailed records than others, but, even if the preparer did not keep a full copy of your records, the summaries in their work papers might serve as evidence of the detailed paperwork you provided to them.
The next step is to see if you can obtain duplicate detailed receipts for items. Some stores can use your checking account number, credit/debit card number, or a customer loyalty card number to access your purchases and reprint receipts. If you don’t have original receipts but can show a pattern of behavior, such as a weekly dinner meeting for your critique group, the auditor might be willing to accept secondary evidence such as your bank account or credit card statement showing routine entries at restaurants. Don’t forget that you may also be able to recreate your deductions via PayPal records or account histories with various suppliers or service provides.
Some writers find it useful to have a credit card and/or bank account used exclusively for their writing business. Having a business-only card or account would make it much easier to identify business-related charges should you have to go back in time to research your expenses.
As a final note, the IRS sometimes grants extensions of time to file and pay taxes for those who live in areas hit by a disaster. If you’re unfortunate enough to suffer a disaster, be sure to take advantage of any extensions offered.
Diane Kelly is a CPA/tax attorney and the author of the humorous Death and Taxes romantic mystery series from St. Martin’s Press.