Increased federal and state scrutiny of tax records in 2003 and budget deficits signal changes ahead for the recordkeeping practices of America's small businesses, according to Fiducial, an international provider of professional business and financial services.
Fiducial says small businesses must pay close attention to recordkeeping this year, as the IRS steps up its auditing and enforcement efforts to reduce tax fraud and do its part to offset large budget deficits.
Rather than waiting until trouble strikes, Fiducial recommends that small businesses establish solid practices for keeping good records throughout the year. Better recordkeeping simplifies tax preparation, helps protect business assets, saves money and provides greater protection against the increased chances of an audit by the IRS or state regulatory authorities.
"Now more than ever, small businesses should maintain accurate records to avoid unnecessary scrutiny by federal and state governments working to detect fraud or other misdeeds," said John Santora, director of systems support and development at Fiducial.
The rate of IRS audits resulting in criminal investigations has increased 22 percent since 2001, Santora said. He predicts this trend will continue as the IRS steps up enforcement efforts to compensate for revenue shortfalls resulting from recent tax cuts signed into law.
"These days, the issue is not if a small business will be audited, but when," Santora said. "Already, the IRS is looking high and low to collect all tax revenue. And, based on the President's State of the Union address where he challenged Congress to make several tax cuts permanent, the IRS is only going to get tougher."
Here are some tips for developing good recordkeeping practices:
- Organize Documents. Separate and keep documents in four categories: Corporate records; Staff records; Accounting and Tax records; and Employee Benefit Plan records. Each category will affect different areas of a business and should be retained for differing amounts of time, according to Fiducial's Santora.
- Store Corporate Records Off-Site. Corporate records include articles of incorporation, Board meeting minutes and stock certificates. Businesses should designate a responsible party to safeguard these documents in a safe and secure off-site location.
- Maintain Staff Records for at least Four Years. There are several regulations that require companies to maintain these records. The Fair Labor Standards Act (FLSA) and Equal Pay Act require employers to retain employee earnings statements for three years. The Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) require companies to retain these records for at least four years.
Small businesses often rely on their payroll service or accountant to provide this valuable service by maintaining copies of these records.
- Keep Accounting and Tax Records for Seven Years. These records should generally be retained for at least seven years, and include invoices, purchase orders and cancelled checks. Some records should be kept indefinitely -- such as those used to calculate gains or losses on property.
Keeping these records makes it easier to prepare accurate company financials and tax returns and eases the rigors of an IRS audit when all deductions are clearly substantiated by backup documentation.
- Retain Employee Benefit Plan Information for Minimum of Six Years. The Employee Retirement Income Security Act (ERISA) mandates that employee plan information such as 401(k) plans be kept on file for a minimum of six years.
Santora noted that maintaining all of these records can pose serious storage problems for many small businesses. "Scanning records into electronic files is a good idea," Santora said. "Secure off-site storage facilities also should be considered."