Records Retention Guidelines
Storing tax records: How long is long enough?
April 15 has come and gone and another year of tax forms and shoeboxes full of receipts is behind us. But what should be done with those documents after your check or refund request is in the mail?
Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the "three-year law" and leads many people to believe they're safe provided they retain their documents for this period of time.
However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.
Documents to keep forever
Copies of your tax returns as filed, tax and legal correspondence, audit reports, general ledger and journals, financial statements, contracts and leases, real estate records, corporate stock records and minutes, mutual fund year-end statements and IRA contribution records.
Although clearing firms that handle purchases from mutual funds are required to submit 1099B forms, these forms only give sales information, not the purchase information you will need in the event of an audit.
While federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.
For instance, real estate records should be kept indefinitely because of the potential for environmental liability. Other non-tax reasons include financial and retirement planning.
Records to Keep Permanently
- Audit Reports of Accountants
- Cancelled Checks for Important Payments
- Cash Books, Charts of Accounts
- Contracts, Leases Currently in Effect
- Correspondence on Legal and Other Important Matters
- Deeds
- Depreciation Schedules
- Financial Statements (Year End)
- General and Private Ledgers, Year End Trial Balances
- Insurance Records, Current Accident Reports, Claims, Policies
- Journals
- Minutes Books of Directors and Stockholders
- Mortgages, Bills of Sale
- Property Appraisals by Outside Appraisers
- Property Records
- Tax Returns and Worksheets, Revenue Agents’ Reports, Any Other Documents Relating to the Determination of Income Tax Liability
- Trademark Registrations
Documents to keep for seven years
Bank statements and deposit slips, sales records and journals, other records relating to revenue, employee expense reports, W-2 forms, 1099s, canceled checks for receipts for child care and charitable contributions, mortgage interest statements, retirement plan contributions and withdrawals, alimony payments or receipts, receipts for medical statements, professional dues, and anything else you declare on your return.
- Accident Reports, Claims
- Accounts Payable Ledgers and Schedules
- Accounts Receivable Ledgers and Schedules
- Cancelled Checks
- Cancelled Stock and Bond Certificates
- Expense Analysis and Expense Distribution Schedules
- Expired Contracts, Leases
- Expired Option Records
- Inventories of Products, Materials, Supplies
- Invoices to Customers
- Notes Receivable Ledgers, Schedules
- Payroll Records and Summaries, including payment to pensioners
- Plant Cost Ledgers
- Purchasing Department Copies of Purchase Orders
- Sales Records
- Subsidiary Ledgers
- Time Books
- Vouchers for Payments to Vendors, Employees, etc.
- Voucher Register, Schedules
Documents to keep for three years
Canceled checks, paid vendor invoices, employee payroll expense records, inventory records.
- Employee Personnel Records (after termination)
- Employment Applications
- Expired Insurance Policies
- General Correspondence
- Internal Audit Reports
- Internal Reports
- Petty Cash Vouchers
- Physical Inventory Tags
- Savings Bond Registration Records of Employees
Documents to keep for three years after the tax life of the asset
Depreciation schedules, other capital asset records, other records relating to asset expenses.
You may be tempted to rely on your accounting firm to keep copies of your returns in the event of an audit. While that is certainly a service your accountant should provide, it's best not to depend on it but to keep copies of your records for your own use.
Returns can be misplaced, buildings can burn down, and many of the documents that support your return aren't kept with your return anyway. These include mileage logs, receipts for travel and entertainment, canceled checks, etc. These supporting documents are vital to have on hand in the event of an audit, but generally your accountant will only keep those documents sent to the IRS, e.g., tax forms and schedules.
While it’s important to keep year-end mutual fund and IRA contribution statements, you don't have to save monthly and quarterly statements once the year-end statement has arrived.
Document to keep for one year
- Bank Reconciliation's
- Correspondence with Customers and Vendors
- Duplicate Deposit Slips
- Purchase Orders (other than Purchasing Department copy)
- Receiving Sheets
- Requisitions
- Stenographer’s Notebooks
- Stockroom Withdrawal Forms
