Record Retention for Tax Audits & Legal Concerns
If the IRS decides to audit a taxpayer, they will need to review certain records that the taxpayer used to calculate their tax obligation and deductions. Failing to keep the necessary records can lead to negative consequences that could have been avoided otherwise. In addition to keeping a copy of your tax return, you should make sure to keep copies of any W-2 forms from employers, any 1099 forms, any 1098 forms from financial institutions related to mortgage interest, any acknowledgments of charitable contributions, any statements from brokerage firms and mutual funds, and any Schedule K-1s related to partnerships, S corporations, or trusts and estates. You also should preserve records related to business expenses for which you are claiming deductions, and you should keep canceled checks and credit card statements to prove that you paid for expenses for which you are claiming a deduction. Finally, you should keep proof that your return was properly filed, such as an IRS email acknowledging its receipt.
In general, the IRS has three years to audit a taxpayer after the date when they file their return. However, the statute of limitations extends to six years if a taxpayer underreported their gross income by more than 25 percent. There is no statute of limitations if a taxpayer failed to file a return or filed a fraudulent return. While you technically need to keep your tax returns for only as long as the IRS could conduct an audit, you may want to keep them permanently. In some cases, they may be helpful in other areas of life, such as applying for insurance or a loan. Documents that you used to fill out your returns, such as those described above, should be kept for six years. Any records of long-term assets for which you are claiming a deduction through depreciation should be kept for three years after the term of depreciation ends.
Record Retention for Businesses
Beyond the basic guidelines for retaining records, additional best practices apply to business records. The appropriate strategy may depend somewhat on the nature of the business, but generally a business owner should permanently keep any business income tax returns and correspondence with the IRS. You should keep these records for at least seven years, according to IRS guidance. You also should keep cancelled checks and bank account and credit card statements for at least seven years. If you run a business with employees, you should keep employment tax records for at least four years after your employment taxes were due or were paid, whichever date is later. You may want to keep records of employee benefits and pension plans permanently.
You should keep business ledgers, invoices, expense reports, profit and loss statements, and other financial statements for at least seven years. Many tax advisers will recommend that businesses keep these records permanently. If your business has assets that affect your taxes, you should keep records involving those assets for as long as the period of limitations lasts after your business disposes of the property. You will want to keep any real estate deeds or motor vehicle titles in a secure location until and unless your business disposes of the real estate or vehicle. Sometimes a business maintains human resources files that contain information regarding current employees, former employees, and job applicants. You should keep these records for at least seven years after an employee has left your business, or three years after you decided not to hire a job applicant. If an employee was injured on the job, you should keep records related to that matter for at least seven years. If an employee sued your business for discrimination, you should keep those records for at least four years after the end of the case.
You may need to adjust your record retention practices if litigation is pending. This may require keeping records for longer than you would otherwise. You can consult a business or tax attorney for guidance if you are uncertain about which practices to follow in a certain situation.
