Typically, most of us keep everything for fear of not having the right document at the right time. Our file cabinets and boxes grow until there is no more room, or until a major change in life circumstances forces us to downsize.
In this brief (comparatively) article I hope to cover most of the record retention requirements. I teamed up with Robert Long of Coral Springs, Florida to make sure I provided accurate information. Robert is a CPA in his own practice (Robert E. Long M.A., C.P.A., P.A.) and has been serving small businesses for decades. As the internet and email has made our world more virtual, he is now serving small business owners in many states across the nation. Here are his thoughts on the subject.
Before you head for the trash can, make sure you’re not disposing of records you may need. You don’t want to be caught empty-handed if the Treasury Department contacts you. And, please keep in mind, these are guidelines for both personal as well as business records, so they should be applied accordingly.
There may also be legal issues to consider, such as documents concerning environmental hazards within or on real property; be certain to discuss these situations with your attorney.
From the perspective of the IRS, there is a broad stroke that states, “Keep all records for as long as you might need them.” In other words, in order for you to support the information reported on your tax return, the record or document must be available. Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept at least until the statute of limitations expires for that return.
In most cases this means that records should be maintained until after the expiration of the statute of limitations for a particular tax year. The federal statue of limitation is three years from the date the tax return is filed or two years from the date the tax is paid, whichever date is later. So, does that mean you’re safe from an audit after three years?
Not necessarily. There are exceptions:
- If the IRS has reason to believe your income was understated by 25 percent or more, the statute of limitations for an audit increases to six years.
- If there is suspicion of fraud or you don’t file a tax return at all, there is no time limit for the IRS.
Also, it is important to know that the statue of limitation does not begin until the tax return is filed and if the return is considered fraudulent there is no limitation on when the records can be summoned.
Even with the statute of limitation, there are records that do not have to be maintained for more than a year, some three years, other seven years, and certain documents need to be permanently maintained. You should keep some records indefinitely, such as property records, since you may need them to prove the amount of gain or loss if the property is sold.
There is a need to use common sense to find the balance between keeping too much and not keeping records long enough. For specific information please seek the advice of your accountant or tax advisor since business requirements can vary.
Maintain a Master List & Identify Each Stored Box
Keep the following documents for a minimum of three years:
- Bank Reconciliations and Statements
- Canceled Checks
- Correspondence with customers and vendors
- Duplicate bank deposit slips
- Employment applications
- Monthly accounts receivable and accounts payable aging reports
- Petty cash vouchers
- Physical inventory tags and records
- Purchase orders and receiving reports
- Sales Records and Journals
Keep the following documents for a minimum of seven years:
- Accounts receivable and accounts payable ledgers
- Accounts receivable and accounts payable year end aging reports
- Bank statements
- Canceled checks
- Customer invoices
- Expired Contracts & Leases
- Interim financial statements (monthly or quarterly)
- Inventory summaries
- Loan payments and schedules
- Payroll Records & Tax Returns
- Time Sheets
- Personnel records after termination
- Vendor invoices
- Vouchers for Payment to Employees for Reimbursements, Allowances, etc.
- Sales Tax Returns – State regulations vary. Check with your tax advisor for the required retention period for returns and supporting documentation.
Keep the following documents in a permanent file indefinitely:
- Annual financial statements
- Contracts & Leases Still in Effect
- Articles of Incorporation and By-Laws
- Company Policy & Practice Manuals
- Board meeting minutes
- Employee pension records
- Insurance Policies (including expired policies)
- Charts of Account
- General ledger
- Depreciation Schedules
- IRS audit reports
- Real property documents including closing statements, appraisals, deeds, mortgages, property tax records, and canceled checks
- Real estate records – Keep these for as long as you own the property, plus three years after you dispose of it (according to IRS guidelines) and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims, and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.
- Securities -To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment, and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.
- Individual Retirement Accounts (IRAs) – The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRA accounts. With the introduction of Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned. If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.
- Completed tax returns – Many tax advisers recommend that you hold onto copies of your finished tax returns forever. Why? So you can prove to the IRS that you actually filed. Even if you don’t keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.
Backup records – Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least the three year period.
- Exceptions – There are some cases when taxpayers get more than the usual three years to file an amended return. You have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items
- Issues affecting more than one year - Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carry backs or carry forwards or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, per IRS instructions
The burden of proof, or the responsibility to substantiate items on your tax return, at one time rested entirely on the taxpayer. Since the passage of the Internal Revenue Service Restructuring and Reform Act of 1998, the burden has shifted to the IRS in the event of a courtroom proceeding, but only if you meet the requirements to retain proper records and make them available for inspection. So while the law now takes some of the heat off taxpayers, it only applies if you diligently maintain records and cooperate with reasonable requests from the IRS.
For additional information on record retention, view the IRS Publication 552, “Record keeping for Individuals.” If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, whichever is later. For additional information, refer to Publication Number 583, starting a Business and Keeping Records. People in business often have expenses for travel, entertainment, and gifts. The documentation you should keep for each of these expenses can be found in Publication Number 463, Travel, Entertainment, Gift and Car Expenses.
Whew!! I’m glad I didn’t try this all on my own. :-)
Hopefully, this article has given you the information you need to reduce the amount of documents you save. If you would like to contact Robert Long, you can do so by calling him at 954-603-0480 or emailing him at email@example.com.
Posted by: Mike Clough