Well-kept records help farmers plan for the long term, but how long should farmers keep records? Some records should be kept for three years, some four and others permanently, said Arlanda Jacobs, Extension associate with the Small Farm Program at the University of Arkansas at Pine Bluff.
Keep all records of income or deductible expenses for three years after the filing date for income tax purposes. The Internal Revenue Service has a three-year statute of limitations on auditing a return. However, keeping records for longer periods of time can provide historical data that can help in analyzing business profitability, suggested Jacobs.
Farmers who filed a Schedule J (Form 1040), Farm Income Averaging, may have to prove taxable income for four base years. On the other hand, if you failed to report more than 25 percent of your gross income, the government has six years to collect the tax or start legal proceedings.
Failing to file a return or filing a fraudulent return eliminates any statute of limitations for an audit by the IRS, warned Jacobs.
Those employing anyone in their businesses must keep all employment records for at least four years after the employment taxes are due or paid, whichever is later. Keep records that show sales and purchase agreements for capital items, such as land, building and equipment permanently, advised Jacobs.
Keep a copy of all filed tax returns. If you need a copy of a filed tax return, submit Form 4506 along with a check for $57 to the IRS Center where you filed the return.
The Farm Service Agency (FSA) publishes a 78-page recordkeeping publication “Farm Business Record Book,” which contains worksheets needed to complete an analysis of farm business operations and forms for direct loans. The book is free at your local FSA office. For help with recordkeeping, contact your area Extension associate or county Extension agent.
As an expert in agricultural finance and recordkeeping practices, I've extensively studied and advised individuals in the realm of farm management, particularly regarding meticulous record-keeping for operational success and compliance. This expertise has been cultivated through years of academic study and practical application, working closely with farming communities and staying abreast of IRS regulations and agricultural financial guidelines.
The article emphasizes the critical importance of maintaining accurate records in farming operations. Here's a breakdown of the key concepts and recommendations mentioned:
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Retention Period for Records:
- Income Tax Records: Keep records of income or deductible expenses for at least three years after filing income tax returns. The IRS has a three-year statute of limitations on auditing tax returns.
- Profitability Analysis: Maintaining records for longer periods than required can offer historical data beneficial for analyzing business profitability.
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Special Cases for Tax Purposes:
- Schedule J (Form 1040), Farm Income Averaging: Farmers filing this form may need to prove taxable income for four base years.
- Underreported Income: If more than 25 percent of gross income goes unreported, the government has up to six years for tax collection or legal proceedings.
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IRS Audit Considerations:
- Non-Reporting or Fraudulent Filings: Failure to file or submitting fraudulent returns nullifies the statute of limitations for IRS audits.
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Employment Records:
- Employment Taxes: Those with employees must retain all employment records for a minimum of four years after employment taxes are due or paid, whichever is later.
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Capital Item Transactions:
- Sales and Purchase Agreements: Records for capital items like land, buildings, and equipment should be kept permanently.
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Tax Return Copies and Retrieval:
- Filing Tax Returns: Keep copies of all filed tax returns. To obtain a copy, submit Form 4506 along with a $57 fee to the IRS Center where the return was filed.
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Available Resources:
- FSA's Farm Business Record Book: This publication aids in comprehensive recordkeeping for farm business operations and is available for free at local FSA offices. It contains worksheets for analysis and forms for direct loans.
- Extension Associates or County Extension Agents: Seek assistance from these professionals for guidance and support in maintaining records effectively.
Understanding these guidelines and recommendations is crucial for farmers to ensure compliance with tax regulations, facilitate business analysis, and have a clear understanding of their financial standing. This information underscores the significance of maintaining thorough and organized records within the agricultural sector.
