Records Retention

By Thomas Tartaglia, CPA (Jan, 2010)

Is one of your new year's resolutions to clean out your old file storage? If not, it should be.

The start of a new year is the perfect time to go through all your old financial and business records and purge what is not needed. The question is: what are you required to keep and for how long? If I get audited, what records will I need to provide to the auditor? So, before you have a new year's paper shredding party you should first consider not only what the IRS wants you to keep, but for how long.

Below is a list of recommended document retention periods. It may be necessary to retain some records longer for nontax reasons. For example, insurance policies, leases, real estate closing statements, and employee payroll records should be kept longer for legal purposes. You should consult with your attorney about how long to retain pertinent legal documents.

Recommended Document Retention Time Periods1

 

        Type of Record

 

          Retention Period

Copies of tax returns as filed

 

7 years after liquidation of entity

Tax and legal correspondence

 

7 years after liquidation of entity

Audit reports

 

7 years after liquidation of entity

General ledger and journals

 

7 years after liquidation of entity

Financial statements

 

7 years after liquidation of entity

Contracts and leases

 

7 years after liquidation of entity

Real estate records

 

7 years after liquidation of entity

Corporate stock records and minutes

 

7 years after liquidation of entity

Bank statements and deposit slips

 

6 years

Sales records and journals

 

6 years

Other records relating to revenue

 

6 years

Employee expense reports

 

6 years

Travel and entertainment expenses records

 

6 years

Canceled checks

 

3 years 2

Paid vendor invoices

 

3 years 2

Employee payroll expense records

 

3 years 2

Inventory records

 

3 years 2, 3 

Depreciation schedules

 

tax life of asset plus 3 years

Other capital asset records

 

tax life of asset plus 3 years

Other records relating to expenses

 

3 years 2

Partnership agreement and amendments

 

Permanently

Operating agreement and amendments (LLC)

 

Permanently

  1. This table contains recommended document retention periods based on federal requirements. Any unique retention requirements resulting from state tax statutes will need to be included.
  2. From the later of the tax return due date or filing date. (All records related to a return should be kept for at least six years if there is any concern the IRS could show a significant understatement of gross income on the return.)
  3. Longer if you use LIFO.

There is no required format for keeping records except that they must be readily available. If files are stored electronically, any software needed to access the files also needs to be kept current and available. The IRS has also issued guidance on using electronic storage systems to satisfy record keeping requirements. An important part of any document retention policy is compliance with IRS requirements. All businesses and individuals are required to keep books and records that support the amount of gross income, deductions and credits claimed on the taxpayers' income tax return. At a minimum, these records must be retained until the statute of limitations expires.

The statute of limitations period for income tax returns is generally three years. However, it is six years if there is a substantial understatement of gross income (i.e., the return understates income by more than 25%). The statute never runs if a fraudulent return is filed or if no return is filed. Therefore, a good rule of thumb is to add a year to the statute of limitations period. Using this approach, you should keep most of your income tax records a minimum of four years, but it may be more prudent to retain them for seven years. However, be sure to consider applicable state tax statutes since they may include unique record retention requirements and or statute of limitation periods that are longer than federal periods.

Document destruction is as important as the storage of documents. Paper documents that contain confidential or sensitive data should be shredded using a secure system. Electronic documents are destroyed by deleting them from the medium on which they are stored and then purging the medium itself.

Business record retention is required by the Internal Revenue Code. If you have questions regarding file storage, please call your Dermody, Burke & Brown representative.

 

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