Importance of Recordkeeping
An organization must keep books and records to show it complies with tax rules, and it must be able to document the sources of receipts and expenditures reported on Form 990, Return of Organization Exempt From Income Tax. For additional information on Form 990, please see Chapter 8.
An effective recordkeeping system enables an organization to monitor the progress of programs and aid in the preparation of financial statements and returns. If an organization does not keep required records, it may be unable to show it qualifies for exemption. Thus, the organization may lose its tax-exempt status. In addition, an organization may be unable to complete its returns accurately and may be subject to penalties.
Records can show whether programs are improving, which programs are successful, and what changes an organization may need to make. Good records management can contribute to the success of a program and an organization.
Prepare Financial Statements
It is important for organizations to maintain revenue and expense statements and balance sheets to prepare accurate financial statements. These statements can help an organization when working with banks, creditors, contributors, and funding organizations.
Prepare Annual Returns and Tax Returns
Records must support income, expenses, and credits as reported on the Form 990 series of federal returns and on state tax returns. These can often be the same records used to monitor programs and prepare financial statements. Also, books and records of exempt organizations must be available for inspection by the IRS. If the IRS examines an organization’s returns, the organization may be asked to explain items reported. A complete set of records will speed up the examination.
Substantiation of Taxable Revenue and Expenses
Another reason for good recordkeeping is to substantiate revenues, expenses, and deductions for UBIT purposes. An organization must appropriately track the revenues and expenses subject to UBIT so that it can prepare its UBIT return on Form 990-T, Exempt Organization Income Tax Return. For additional information on Form 990-T, please see Chapter 8.
Comply with Grant-Making Procedures
A charity that makes grants to individuals must keep adequate records to demonstrate that such grants serve charitable purposes. At a minimum, the records should show names and addresses of grantees, purpose of the grant, manner of selecting the grantees, and relationship of the grantees to any members, officers, trustees, or donors of the organization.
Comply with Racial Nondiscrimination Requirements (Private Schools)
Private schools must keep records showing they have complied with requirements relating to racial nondiscrimination, including annual publication of a racially nondiscriminatory policy through newspaper or broadcast media to the community served by the school. For more information, see Schedule E, Schools, on Form 990 and its accompanying instructions (beginning on page 3).
What Records Should be Kept?
Except in a few cases, the law does not specify recordkeeping processes.
A corporation should keep records of board of directors meetings.
An organization can choose any recordkeeping system, suited to its activities, that shows its income and expenses. If an organization has more than one program, it should ensure records identify the income and expense items attributable to each program.
A recordkeeping system must include a summary of transactions. This is ordinarily written in the organization’s books, such as accounting journals and ledgers. The books must show, among other things, gross receipts, purchases, other expenses, employment taxes, and assets. For many small organizations, a checkbook may be the main source for entries in the books, while larger organizations need more sophisticated ledgers and records. All organizations must keep all documentation that supports the entries in the books.
Accounting Periods and Methods
Organizations must keep their financial records based on an annual accounting period called a tax year.
Accounting Periods: A tax year is usually 12 consecutive months. There are two kinds of tax years:
- Calendar tax year: This is a period of 12 consecutive months beginning January 1 and ending December 31.
- Fiscal tax year: This is a period of 12 consecutive months ending on the last day of any month except December.
Accounting Methods: An accounting method is a set of rules used to determine when and how income and expenses are reported. An organization chooses an accounting method when it files its first annual return. There are two basic accounting methods:
- Cash method: Under the cash method, an organization reports income in the tax year received. It usually deducts expenses in the year paid.
- Accrual method: Under an accrual method, an organization generally records income in the tax year earned, even though it may receive payment in a later year. It records expenses in the tax year incurred, whether or not it pays the expenses that year.
Transactions such as contributions, purchases, sales, and payroll will generate supporting documents (e.g., grant applications and awards, sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks) that contain information to be recorded in accounting records. It is important to keep these documents because they support the entries in an organization’s books and on its tax and information returns. They should be marked and stored in a safe location.
Records of Assets and Liabilities
- When and how the asset was acquired
- Documents that support mortgages, notes, loans, or other forms of debt
- Purchase price
- Cost of improvements
- Deductions taken for depreciation
- Deductions taken for casualty losses, such as losses resulting from fires or storms
- How the asset was used
- When and how the asset was disposed of
- Selling price
- Expenses of the sale
|If payment is by:||Then account statement must show:|
|Check||Check number, amount, payee’s name, and date the check amount was posted to the account by the financial institution|
|Electronic funds transfer||Amount transferred, payee’s name, and date the transfer was posted to the account by the financial institution|
|Credit card||Amount charged, payee’s name, and transaction date|
How Long To Keep Records For Tax Purposes?
Additional Record Retention Periods
For More Information
- Publication 583, Starting a Business and Keeping Records, posted January 15, 2015
- Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities, posted July 28, 2014
- Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations, posted August 26, 2014
Forms and Publications
Published by Exempt Organizations, March 28, 2010
Exempt Organizations (EO) is dedicated to fulfilling the IRS mission to provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness. Customer Education & Outreach (CE&O) works closely with EO staff to accomplish this by:
- Developing tailored education programs for customer categories
- Coordinating the development, revision and design of forms, publications and other nonspeaker outreach activities
- Making standardized educational materials available for outreach efforts
- Establishing a way for customers to be heard
These materials are part of a customized program for representatives of small and medium-sized exempt organizations. This text is intended to help you become more familiar with tax laws governing exempt organizations and understand how compliance with these laws will strengthen the organization(s) you represent. This information is for educational use only and may not be cited as precedent.