IRS Code Section 6001: Tax Record Requirements

The Internal Revenue Code requires all taxpayers to maintain records sufficient to prepare a complete and accurate tax return. This requirement is outlined in Code Section 6001, which mandates that individuals and businesses keep records and file returns according to federal regulations. Understanding these obligations is important for managing personal and business finances. This article covers the principles, specific records, retention timelines, and the outcomes of non-compliance.

Core Record Keeping Principles

The principle of Section 6001 applies to any person or business liable for any tax under the Internal Revenue Code. Taxpayers must maintain records sufficient to show whether they are liable for tax, meaning the documentation must clearly establish the amounts of gross income, deductions, and credits reported on a tax return.

The Internal Revenue Service (IRS) does not mandate a specific record-keeping system; taxpayers can choose any method as long as it accurately reflects their financial activity. The system must enable the IRS to determine if a tax liability exists and its correct amount, and these records must be available for inspection at all reasonable times.

Types of Records to Maintain

To comply with tax law, you must maintain a variety of documents to substantiate the figures on your return. For income, this includes Forms W-2 from employers and various Forms 1099 that report miscellaneous, non-employee, or investment income. Bank statements showing deposits, invoices issued to clients, and sales slips are also important for tracking all sources of gross receipts.

Records that support expenses and deductions are also important for reducing your taxable income. These include canceled checks, cash register tapes, credit card statements, and detailed receipts that identify the payee, amount, and nature of the expense. For business-related travel, a mileage log tracking dates, destinations, and purpose is a specific requirement. Keeping these documents organized helps in preparing an accurate return.

Documentation is also required for property and other assets to correctly calculate gains or losses upon their sale. For real estate, this includes closing statements from both the purchase and sale. For securities like stocks and bonds, records should detail the purchase date, cost basis, and sale date to determine capital gains. Taxpayers can maintain these records in either paper or electronic format, provided the system can produce legible copies.

Required Retention Period

The length of time you must keep tax records is determined by the “period of limitations.” This is the timeframe during which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. The general rule is to keep records for three years from the date the tax return was filed or its due date, whichever is later. For example, records for a 2023 tax return filed on April 15, 2024, should be kept at least until April 15, 2027.

Certain situations extend this standard retention period. If a taxpayer understates their gross income by more than 25%, the IRS has six years to assess tax, meaning records must be kept for that duration. A seven-year period applies for claims related to a loss from worthless securities or a bad debt deduction.

In cases of filing a fraudulent return or failing to file a return at all, the period of limitations never expires, and there is no time limit for the IRS to take action. Records related to these circumstances should be kept indefinitely. Similarly, records related to property, such as a home or investments, should be retained until the period of limitations expires for the year in which you dispose of the property, as they are needed to calculate the gain or loss.

Consequences of Inadequate Records

The burden of proof rests on the taxpayer to support all items reported on a tax return. Failing to maintain adequate records can lead to unfavorable consequences. If records are insufficient or nonexistent during an IRS examination, the agency has the authority to disallow any deductions or credits claimed, as the taxpayer cannot prove their entitlement to the tax benefit.

When a taxpayer’s records are inadequate, the IRS is authorized to reconstruct income using any method that it believes reflects the taxpayer’s financial situation. A common approach is the bank deposit method, where the IRS totals all deposits into a taxpayer’s accounts and treats them as taxable income unless the taxpayer can prove otherwise. This reconstruction often results in a higher tax assessment.

Beyond the disallowance of deductions and income reconstruction, poor record-keeping can trigger penalties. The accuracy-related penalty, set at 20% of the underpayment, is applied for negligence or disregard of the rules. Negligence includes any failure to make a reasonable attempt to comply with tax laws, and failing to keep records is a primary example. These penalties are in addition to any back taxes and interest owed.