Legal Record Keeping Requirements: What to Save and How Long

After 10+ years (and one near-miss audit), I learned this critical lesson: proper record keeping isn't just good practice—it's legal requirement and financial protection. The IRS can audit you up to 6 years back. Without records, you lose deductions and face penalties.

Let me show you exactly what records to keep, how long to keep them, and simple systems that make record keeping effortless.

Why Record Keeping Matters

The Stakes:

• IRS Audit: No records = disallowed deductions + penalties + interest
• Legal Disputes: Need records to defend against claims
• Business Decisions: Can't track profitability without records
• Platform Issues: May need to prove transactions

Real Story: Friend got audited (Year 4 in business). Claimed $15,000 in deductions. Only had receipts for $6,000. IRS disallowed $9,000 in deductions = $3,000 extra tax + penalties. Painful.

My Audit (Year 6): Kept meticulous records. Audit lasted 2 hours. No changes. Auditor said "This is how it should be done."

Records = Protection

What Records to Keep

1. Income Records (Everything You Earn)

What to Keep:

• Bank statements (business account)
• Credit card statements (business card)
• Platform sales reports (eBay, Mercari, TCGPlayer)
• PayPal/payment processor statements
• Cash sales log (if any cash transactions)
• 1099-K forms (from platforms)
• Customer invoices/receipts

Why: Prove all income reported accurately

Format: Digital copies acceptable (PDFs, screenshots)

How Long: 7 years

2. Purchase Records (Cost of Goods Sold)

What to Keep:

• Receipts for every card purchase
• Invoices from suppliers
• Credit card statements showing purchases
• Cancelled checks (if paying by check)
• Online purchase confirmations
• Collection acquisition documents

Critical: Cost of Goods Sold is biggest deduction. Must have receipts.

Detail Required:

• Date of purchase
• Seller name
• Items purchased
• Amount paid
• Payment method

How Long: 7 years from date of sale (not purchase)

Example: Buy card in 2023, sell in 2025. Keep receipt until 2032 (7 years from 2025).

3. Business Expense Receipts

What to Keep:

• Shipping receipts (USPS, UPS, FedEx)
• Supply purchases (top loaders, mailers, etc.)
• Equipment purchases (computer, printer, etc.)
• Software subscriptions
• Marketing/advertising expenses
• Professional services (accountant, lawyer)
• Insurance premiums
• Bank/credit card fees
• Mileage logs
• Home office calculations
• Any business-related expense

Receipt Requirements:

• Date
• Vendor name
• Items/services purchased
• Amount
• Payment method

How Long: 7 years

4. Mileage Logs (If Claiming Vehicle Deduction)

What to Record for Each Trip:

• Date
• Starting location
• Ending location
• Miles driven
• Business purpose
• Odometer reading (beginning and end of year)

Apps That Help:

• MileIQ (auto-tracks)
• Everlance
• QuickBooks Self-Employed
• Simple spreadsheet

How Long: 7 years

IRS Scrutinizes Mileage: Detailed logs essential

5. Asset Records (Equipment/Property)

For Each Asset Over $200:

• Purchase receipt
• Date purchased
• Cost
• Depreciation schedule (if depreciating)
• Date sold/disposed (if applicable)

Examples:

• Computer
• Printer
• Camera
• Furniture
• Safe

How Long: 7 years after asset disposed

Example: Buy computer in 2023, dispose in 2027. Keep records until 2034.

6. Employment Records (If You Have Employees/Contractors)

What to Keep:

• W-2s/1099s issued
• Payroll records
• Tax withholding records
• Employee files

How Long: 7 years (some states require longer)

Most Pokemon Sellers: No employees, but if you pay anyone $600+, issue 1099 and keep record

7. Tax Returns and Supporting Documents

What to Keep:

• Filed tax returns (federal and state)
• Schedules (Schedule C, Schedule SE, etc.)
• W-2s received
• 1099s received
• Payment confirmations

How Long: 7 years minimum (IRS can audit 6 years back for substantial underreporting)

Some Experts Say: Keep tax returns forever (small file size, good reference)

How Long to Keep Records: The 7-Year Rule

IRS Audit Window:

• 3 years: Standard audit window
• 6 years: If you underreported income 25%+
• Forever: If fraud or no return filed

Safe Rule: Keep everything 7 years

Exception: Keep longer if state has longer requirement (some states audit up to 10 years)

After 7 Years: Shred or delete securely

Record Keeping Systems

Option 1: Physical Files (Old School but Works)

Setup:

• Filing cabinet or file box
• Folders by year and category
• Label: "2024 - Inventory Purchases"

Advantages:

• Tangible
• No tech required
• Can physically touch receipts

Disadvantages:

• Takes space
• Can be lost/damaged
• Hard to search

Best For: Those uncomfortable with digital

Option 2: Digital Files (My Recommendation)

Setup:

• Computer folder structure
• Cloud storage (Google Drive, Dropbox, OneDrive)
• Scan all paper receipts
• Save digital receipts (PDFs, screenshots)

Folder Structure:

Pokemon Business/
├── 2024/
│   ├── Income/
│   │   ├── eBay_Sales_2024.pdf
│   │   ├── Mercari_Sales_2024.pdf
│   │   └── PayPal_2024.pdf
│   ├── Purchases/
│   │   ├── Jan_Receipts/
│   │   ├── Feb_Receipts/
│   │   └── ...
│   ├── Expenses/
│   │   ├── Shipping/
│   │   ├── Supplies/
│   │   └── ...
│   ├── Mileage/
│   └── Tax_Return_2024.pdf
├── 2025/
└── ...

Advantages:

• No physical space
• Searchable
• Backed up in cloud
• Accessible anywhere

Disadvantages:

• Requires tech comfort
• Need backup system

Tools:

• Scanner app (Adobe Scan, CamScanner - free)
• Cloud storage
• Accounting software (auto-organizes)

Best For: Most sellers

Option 3: Accounting Software (Best for Scaling)

Software Options:

• Wave (FREE, great for beginners)
• QuickBooks Self-Employed ($15/mo)
• FreshBooks ($17/mo)

Features:

• Auto-import bank transactions
• Attach receipts to transactions
• Categorize automatically
• Generate reports
• Track mileage
• Calculate taxes

Advantages:

• Mostly automatic
• Everything in one place
• Tax-ready reports
• Minimal effort

Disadvantages:

• Monthly cost
• Learning curve
• Over-kill for tiny businesses

Best For: $25,000+/year revenue or anyone wanting ease

My Progression: Spreadsheet Years 1-2 → QuickBooks Year 3+

Receipt Management: Daily Habits

Daily/Weekly Routine:

1. Collect Receipts

• Folder in wallet for business receipts
• Take photo immediately (backup)
• Keep separate from personal receipts

2. Process Weekly (15 minutes)

• Scan or save digital copies
• Name files clearly: "2024-03-15_USPS_Shipping.pdf"
• Move to appropriate folder
• Shred originals after scanning (or keep in folder)

3. Log in Spreadsheet/Software

• Enter transaction
• Attach receipt
• Categorize

Consistency is Key: 15 min/week beats 8 hours once a year

What If You Don't Have a Receipt?

Best Effort Documentation:

• Bank/credit card statement (proves amount and vendor)
• Written log (date, amount, purpose, reason no receipt)
• Cancelled check
• Email confirmation

IRS Prefers Original Receipts: But contemporaneous records (created at time of expense) accepted

Going Forward: Always get and keep receipts

Organizing Inventory Records (Special Consideration)

Challenge: Tracking cost basis for hundreds/thousands of cards

Solution: Inventory Spreadsheet

Columns:

• Date Purchased
• Card Name
• Set
• Condition
• Purchase Price (cost basis)
• Date Sold
• Sale Price
• Profit/Loss

Why: Proves cost of goods sold, tracks profitability

Update: When you buy (log purchase) and when you sell (log sale)

How Long to Keep: 7 years from date of sale

Digital Security and Backups

Your Records are Business-Critical:

Backup Strategy:

1. Primary: Computer/phone
2. Backup 1: Cloud storage (Google Drive, Dropbox)
3. Backup 2: External hard drive (annual backup)

3-2-1 Rule:

• 3 copies of data
• 2 different media types
• 1 offsite (cloud)

Encryption: Password-protect sensitive files

Don't Rely on Single Location: Computer crash could destroy records

Preparing for Potential Audit

Audit-Ready Checklist:

✓ All income documented and matches 1099-Ks ✓ All expense receipts saved and organized ✓ Mileage log detailed and complete ✓ Home office calculation documented ✓ Asset records maintained ✓ Inventory cost basis tracked ✓ Bank statements saved ✓ Tax returns and supporting documents filed

If You're Audit-Ready: Audit is no big deal

Common Record Keeping Mistakes

Mistake 1: No System

• Receipts in random boxes, bags, email
• Impossible to find when needed

Mistake 2: Not Tracking Cash Purchases

• Cash purchases without receipts = can't deduct

Mistake 3: Mixing Personal and Business

• Personal purchases in business account (or vice versa)
• Makes tracking nightmare

Mistake 4: Not Keeping Long Enough

• Throwing out after 3 years (IRS can go back 6 years)

Mistake 5: No Backups

• Computer crash = all records lost

Mistake 6: Incomplete Receipts

• Receipt doesn't show what was purchased
• Can't prove business use

Mistake 7: Reconstructing Later

• Trying to recreate records after the fact
• IRS skeptical of reconstructed records

Record Keeping for Different Business Stages

Beginner (Under $10,000/year):

• Simple spreadsheet
• Digital receipt folder
• Weekly processing (15 min)

Intermediate ($10,000-50,000/year):

• Accounting software (Wave or QuickBooks)
• Dedicated business bank account
• Regular bookkeeping (1 hour/week)

Advanced ($50,000+/year):

• Professional accounting software
• Consider hiring bookkeeper
• Monthly financial reviews

Action Steps

1. This week: Set up digital folder structure or choose accounting software
2. This week: Gather all receipts from this year (catch up if behind)
3. This month: Implement weekly receipt processing routine (15 min)
4. This month: Set up cloud backup for all records
5. This month: Create mileage log system (if claiming vehicle)
6. Ongoing: Save every receipt, process weekly, backup monthly
7. Annual: At year-end, organize all records, prepare for tax filing

Ready to Master Record Keeping?

This is Module 5.6 of Week 5 in the Pokemon Business Startup Course.

Complete course includes:

• Record keeping spreadsheet templates
• Receipt organization systems
• Mileage tracking templates
• Backup checklists
• Audit preparation guide
• Software setup tutorials

Enroll in the Pokemon Business Startup Course →

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Module 5.6 of Week 5 - Pokemon Business Startup Course