Preparing Bank Statements and Records for an IRS Audit

According to the IRS, it conducts audits either by mail or through an in-person interview to review your records. A mail audit starts with a letter requesting additional information about certain items shown on the tax return, such as income, expenses or itemized deductions. In-person audits can take place at an IRS office or at your home, business, or your accountant's or representative's office. If you have too many books or records to mail, the IRS says you can request a face-to-face audit.

The IRS says it will give you a written request for the specific documents it wants to see. It also says it accepts some electronic records in lieu of or in addition to other types of records, and tells you to contact your auditor to find out what is acceptable.

On timing, the IRS page says it can generally include returns filed within the last three years in an audit, and that it usually does not go back more than the last six years. It also says you can ordinarily get a one-time automatic 30-day extension to respond.

The IRS page on how long to keep records says you should generally keep records until the period of limitations for that tax return runs out. It lists several periods. Keep records for 3 years if the other situations on the page do not apply. Keep them for 6 years if you leave out income that should have been reported and it is more than 25% of the gross income shown on your return. Keep them for 7 years for claims involving worthless securities or bad debt deductions. Keep them indefinitely if you do not file a return or file a fraudulent one. Employment tax records should be kept for at least 4 years after the tax becomes due or is paid, whichever is later.

Because the right period depends on your circumstances, read the IRS page itself or ask a professional rather than relying on a summary. The IRS page also suggests checking non-tax requirements, such as those from insurers or creditors, before discarding records.

The IRS recordkeeping page says good records help you monitor the progress of your business, identify sources of income, keep track of deductible expenses and support items reported on your tax returns. It says you can use any system that clearly shows your income and expenses, and that you must be able to prove certain elements of expenses to deduct them.

The IRS page on what kinds of records to keep lists supporting documents including sales slips, paid bills, invoices, receipts, deposit slips and canceled checks, and says it is important to keep them because they support the entries in your books and on your tax return. It lists account statements among expense records and deposit information among gross receipts records, and notes that for most small businesses the business checking account is the main source for entries in the business books.

Bank statements are not named as a required document on these pages, so do not read them as a rule. They are one place where deposits and payments are recorded, which is why many people keep them with their other records.

Converting a statement PDF into a spreadsheet turns each transaction into a row. That does not meet any IRS requirement by itself, but it makes your own review easier. A reasonable workflow, shown here with a made-up example:

• Put every statement for the year into one sheet and add a Category column that you fill in, such as Sales, Supplies, Software, Travel or Owner draw.

• Add a Receipt column with the file name of the matching invoice or receipt, so you can see which entries have supporting documents and which do not.

• Use SUMIFS or a pivot table to total each category. For example, a synthetic year might show 4,320.00 in Supplies across twelve months.

• Highlight rows with no receipt or no clear purpose, and write a note while you still remember the details.

Keep the original statements. The spreadsheet is a working copy, and the original documents remain the source records. Check each month by confirming that the opening balance plus deposits minus withdrawals equals the closing balance printed on the statement.

If the IRS asks for particular documents, send what it asks for and ask the auditor which formats it accepts, as the IRS page suggests. Do not alter the originals, and keep a copy of everything you send.

PDFtoRow can convert bank statement PDFs to Excel or CSV so the transactions are ready to categorise.