How do I know if I need to keep records or toss them?
The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
View the original article by Dennis Najjar on accountingdepartment.com here.
Many businesses aren’t sure how long records must be saved in the paperless era. Record-keeping is a boring, but important business activity, and if you make the wrong choices, you risk litigation, succession planning problems, and the wrath of the taxman. Understanding how long should you keep business records will help you avoid these problems.
The General Rule
The Internal Revenue Service has established some basic record-keeping rules for tax documents. Outside the tax arena, there’s remarkably little guidance about how long you should keep business paperwork. Most lawyers, accountants and bookkeeping services recommend keeping original documents for at least seven years. As a rule of thumb, seven years is sufficient time for defending tax audits, lawsuits and potential claims.
Specific Documents
- Business Tax Returns and supporting records must be kept until the IRS can no longer audit your return. In most cases, the IRS can audit you for three years after a filing, but that time period extends to six years if the IRS suspects you made a “substantial error” on your return.
- Payroll tax records, including time sheets, wages, pension payments, tax deposits, benefits and tips must be kept for at least four years after the date the taxes fell due or the date you actually paid them, whichever is later.
- Current employee files should be retained for at least seven years after an employee leaves, is terminated or retires. However, if an employee suffers a work-related accident or files a claim against the business, it’s advisable to retain your records for up to 10 years after the claim is resolved.
- Job applicant information must be kept for at least three years, even if you didn’t hire the applicant.
- Ownership Records, such as business formation documents, annual meeting minutes, by-laws, stock ledgers and property deeds, should be retained permanently.
- Accounting Services Records should be retained for a minimum of seven years. Accountants, being a conservative bunch, will often recommend that you keep financial statements, check registers, profit and loss statements, budgets, general ledgers, cash books and audit reports permanently.
- Operational Records, including bank account statements, credit card statements, canceled checks, cash receipts and check book stubs, follow the seven year rule.
These periods are not offered as final authority, but as a guide. Your CPA, outsourced accounting service or tax attorney may recommend a different approach based on the rules of your industry and the specific needs of your business.
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