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Why your business needs a paper trail

Nobody likes hearing that the IRS chose to audit them, but business managers might feel even more distressed. Your company probably has seemingly endless transactions within its regular operations and now you must somehow account for all of it.

In order to prove that you and your business abide by the law, you must help the IRS or investigators follow the money through evidence. You may have already heard that you need a “paper trail” for your company, but what does that actually require?

Examples of records to keep include tax documents, employee payroll data, receipts, invoices, contracts, carbon copies of checks, licenses and bank statements. It’s always a good idea to scan physical copies into a computer with appropriate back-up in case of flood or fire.

These papers can easily pile up and you might be tempted to throw out everything at the end of the year. However, you should be careful about when you toss certain documents away.

According to the IRS, you should hang on to many of these records for three years, although there are several exceptions listed on their website. Other parties, such as insurance providers, may need details from months or even years ago. If you can, it’s a great idea to keep information on your company’s entire financial history.

Good record-keeping is often overlooked in the day-to-day routine, so you can set up systems to help automate and store your data. Cloud-type services allow you to keep copies of the documents online. Some managers also choose to use special software to track finances.

When you don’t have records to prove that your company is lawful, you could end up in a tough situation. Owners and managers should consider forming record-keeping strategies as they craft their business.

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