The Records You Need to Keep (And the Ones You're Probably Missing)

The letter arrives on IRS letterhead. They’re auditing your 2024 return. They want documentation for certain deductions.

You spent that money. You know you spent it. But can you prove it?

The shoebox of receipts got thrown away during the office reorganization. The credit card statement shows a charge at Home Depot for $847, but what exactly did you buy? Was it materials for a client project or that patio furniture?

This is when record keeping becomes real. And by then, it’s too late.

Why Records Matter Beyond Taxes

The IRS requires documentation to support income, deductions, and credits on your returns. But records serve other purposes too:

Disputes with vendors or customers: “You never paid that invoice.” Without records, it’s your word against theirs.

Loan applications: Lenders want clean financial records. Chaos disqualifies you from better rates—or any rate.

Business sale or transition: Buyers perform due diligence. Incomplete records tank valuations or kill deals entirely.

Decision making: How do you know if marketing is working if you can’t track spend versus returns?

Records are your business memory. Without them, you’re operating on guesswork.

What the IRS Requires

Income Records

Document every dollar entering your business:

Sales receipts and invoices you issued to customers
Point-of-sale reports or cash register tapes
Bank deposit slips and statements
1099 forms received from clients
Credit card and payment processor statements
Contracts showing payment terms

The IRS wants to verify you reported all income. Your records should clearly show the source and amount of every dollar received.

Expense Records

Document every dollar leaving your business:

Receipts for all purchases
Cancelled checks or bank statements showing cleared payments
Credit card statements with itemized charges
Invoices from vendors and suppliers
Petty cash logs with supporting receipts
Mileage logs for vehicle expenses
Travel records including itineraries and business purpose

What Makes a Complete Receipt?

The IRS requires receipts to show:

Amount paid
Date of transaction
Payee (who you paid)
Description of goods or services
Business purpose

That credit card statement showing “$847.23 - Home Depot” isn’t enough. It doesn’t show what you bought. Keep the itemized receipt.

A Houston contractor lost $3,200 in deductions during an audit because he had credit card statements but no receipts. The statements proved he spent money at supply stores. They didn’t prove the purchases were business-related.

Asset Records

Document property and equipment:

Purchase documents (invoices, sales agreements)
Proof of payment
Date placed in service
Original cost and improvements
Depreciation schedules
Sale or disposal records

Keep asset records for the life of the asset plus 7 years after disposal.

Employment Records

If you have employees, maintain:

W-4 forms (withholding certificates)
I-9 forms (employment eligibility verification)
Payroll records (wages, hours, deductions, payments)
941 quarterly reports
W-2s and W-3s
Benefits records
Hiring and termination documentation

Business Formation Documents

Keep permanently:

Articles of incorporation or organization
Operating agreements (LLCs) or bylaws (corporations)
EIN assignment letter
Business licenses and permits
Annual reports filed with the state
Meeting minutes (corporations)
Ownership certificates

These establish your business’s legal existence. Lose them, and replacing them becomes expensive and time-consuming.

Banking and Financial Records

Bank statements (all accounts)
Reconciliation reports
Loan agreements and payment records
Investment statements
Insurance policies

Tax Returns and Supporting Documents

Filed tax returns (federal, state, local)
Payment confirmations
Correspondence with tax authorities
Amended returns
Extension requests

How Long to Keep Records

Record Type	Retention Period
Tax returns and supporting documents	7 years
Income and expense records	7 years
Bank statements and cancelled checks	7 years
Employment tax records	4 years after tax is due or paid
Payroll records	4 years minimum (some states require longer)
I-9 forms	3 years after hire OR 1 year after termination (whichever is later)
Asset/property records	Life of asset + 7 years
Contracts	Duration + 7 years
Business formation documents	Permanent
Corporate minutes	Permanent
Insurance policies	Permanent (for claims that may arise)

Why 7 Years Instead of 3?

The IRS has three years to audit most returns, but this extends to:

6 years if you underreport income by more than 25%
No limit for fraud or failure to file

Seven years covers the 6-year scenario with a buffer. Some tax professionals recommend retaining records indefinitely in digital form—storage is cheap, and the downside of not having records is significant.

Building a System That Works

Go Digital First

Physical receipts fade. Thermal paper becomes unreadable within 18 months. Paper takes up space and gets lost.

The approach:

Photograph or scan receipts immediately. Not later. Not when you get back to the office. Immediately.
Name files consistently. Use format: Date_Vendor_Amount (example: 2025-03-15_HomeDepot_234.56.pdf). This makes searching possible.
Organize in folders by year and category.
Use cloud storage (Google Drive, Dropbox, OneDrive) for automatic backup.
Integrate with accounting software when possible. Attach receipts directly to transactions.

Folder Structure Example

2026/
├── Income/
│   ├── Invoices Sent/
│   ├── Bank Deposits/
│   └── 1099s Received/
├── Expenses/
│   ├── Office Supplies/
│   ├── Professional Services/
│   ├── Utilities/
│   ├── Travel/
│   └── Vehicle/
├── Payroll/
├── Bank Statements/
├── Tax Returns/
└── Contracts/

Accounting Software Integration

Modern accounting software allows you to:

Attach receipts directly to transactions
Auto-categorize expenses
Generate reports for tax preparation
Export records for backup

This integration creates an audit trail connecting your receipt to the bank transaction to the expense category—exactly what the IRS wants to see.

The Weekly and Monthly Rhythm

Weekly:

Scan/photograph new receipts
Record cash transactions
Review uncategorized transactions

Monthly:

Reconcile bank accounts
Review financial statements
File loose documents
Back up digital records

Annually:

Archive prior year records
Purge records past retention requirements
Update record-keeping procedures

The rhythm matters more than the specific system. Consistent habits prevent backlogs.

Special Situations

Home Office Records

Keep documentation of:

Square footage of office space
Total square footage of home
All household expenses claimed
Photos showing exclusive business use

If the IRS questions your home office deduction, you’ll need to demonstrate the space is used regularly and exclusively for business.

Vehicle Records

If claiming business vehicle expenses:

Maintain a mileage log (date, destination, purpose, miles)
Keep all receipts for actual expenses if using that method
Document business versus personal use percentage

Vehicle deductions are heavily audited. Detailed mileage logs are your protection.

Contractor Records

For each contractor, keep:

W-9 form
Invoices received
Payment records
Copy of 1099-NEC issued

Inventory-Based Businesses

Additional requirements:

Beginning and ending inventory valuations
Purchase records for inventory
Inventory count documentation
Cost of goods sold calculations

What Happens Without Good Records

During an IRS Audit

Without supporting documentation:

Deductions may be disallowed entirely
The IRS may estimate income higher than actual
You face accuracy penalties (20% of underpayment)
Potential fraud penalties if records were intentionally destroyed

A Houston restaurant owner faced a $47,000 adjustment because she couldn’t document food costs. The expenses were real. She just couldn’t prove it.

In Business Operations

Poor record keeping causes:

Difficulty obtaining loans (lenders want clean records)
Inability to prove expenses to partners or investors
Challenges during business sales or transitions
Higher accounting fees (cleaning up messes costs more)
Inaccurate financial statements leading to bad decisions

Texas-Specific Considerations

While Texas has no state income tax, you still need records for:

Federal tax compliance (everything discussed above)
Texas franchise tax (if applicable to your business)
Sales tax (if you collect it)
Local business permits (Houston and Harris County requirements)

Getting Your Records in Order

If your records are scattered, incomplete, or nonexistent, start now. The longer you wait, the harder it gets.

At EZQ Group, we help Houston businesses establish record-keeping systems that work, catch up on backlogged documentation, and maintain the records needed for tax compliance and business success.

Ready to get organized? Contact us to discuss your record-keeping needs.

This article provides general information and is not legal or tax advice. Retention requirements vary by state and situation. Consult with a qualified professional about your specific circumstances.