You've probably heard that you should keep your tax returns for three years, but the truth is, you may need to hang onto some documents indefinitely. And since poor recordkeeping can lead to hefty penalties, it's important to understand the guidelines.
What the IRS actually says about how long to keep records
Though the IRS recommends keeping your records for three years after filing a return, the actual timeline is somewhat vague. The agency states that if it identifies a substantial error, it may ask for additional years, though it doesn't usually go back more than six years.
So how long should you keep tax documents? The IRS provides the following guidelines for specific situations:
- If you claim a bad debt deduction or loss from worthless securities, keep all documents for seven years.
- If you underreport income, and it's more than 25% of your gross income, you should retain records for six years.
- If you file a fraudulent return or didn’t file a return at all, you should keep all tax and supporting documents indefinitely.
- If you have employees, you should retain employment tax records for four or more years after the tax was due or you paid it — whichever date is later.
Accounting and tax documents to retain permanently
Some tax records should never be thrown away. For instance, if the IRS believes you filed a fraudulent return, they might ask to see statements or canceled checks showing you paid for items you deducted and receipts for the purchase. And there isn't a statute of limitations for fraudulent returns.
Here’s a list of documents you may want to retain permanently:
- Audit reports.
- Chart of accounts.
- Depreciation schedules.
- Financial statements (annual).
- Fixed asset purchases.
- General ledger.
- Inventory records when using the last in, first out (LIFO) method.
- Tax returns.
- Canceled or substituted checks for real estate purchases.
- Information about leases or mortgages.
- Patent and trademark details.
- Corporate shareholder records.
- Stock registers and transactions.
- Employee pension and profit-sharing plans.
- Construction records.
- Leasehold improvements.
If you're unsure whether a document can be discarded, it's usually safer to keep it. Before destroying older records, consider whether they may be necessary for insurance claims, legal matters, or state record retention laws.
For many small businesses, maintaining digital records is often easier than storing years' worth of paper files.
Tax record storage guidelines
The IRS accepts both paper and electronic records, assuming they're accurate, legible, and accessible if they are requested during an audit. For many small businesses, maintaining digital records is often easier than storing years' worth of paper files.
Here’s how to create a reliable recordkeeping system:
- Scan paper receipts immediately after receiving them.
- Store digital files in organized folders by tax year and document type.
- Use consistent file names for all documents.
- Back up all of your records in the cloud.
- Restrict access to sensitive tax documents using strong passwords and multifactor authentication.
- Periodically verify that older files are still readable and accessible.
Risks of poor tax record management
It's easy to be casual about recordkeeping, but it could lead to serious consequences. If you have incomplete or disorganized records, you’re at a higher risk of being audited, and the IRS may scrutinize your income further if it can’t verify your income and deductions. Misreporting income or deductions could lead to fines and penalties, and there could be legal consequences if the IRS suspects negligence or fraud.
Even if you're never audited, poor recordkeeping can cause challenges in your personal and business life. It could make it harder to apply for a loan or sell your business. It could also put your company at higher risk for a data breach.
Tools for simplifying tax document retention
Fortunately, there are tools to help you simplify saving your tax documents. Some of the best options to try include:
- Document storage: Google Drive, Dropbox, and OneDrive allow you to securely store and organize your tax documents.
- Accounting software: The right accounting software tracks your income and expenses and stores tax-related documents.
- Receipt tracking: You can use software like Expensify to scan and categorize your receipts. Not only can this help you if you're audited, but it can also simplify tax filing each year.
- Backup solutions: Consider investing in a backup solution like an external hard drive or cloud storage solution.
How long to keep specific tax records
- Filed tax returns: permanently.
- Supporting tax documents: at least three years after filing.
- Payroll tax records: at least four years.
- W-2s and 1099s: at least three years.
- Bank statements: three years.
- Business expense receipts: three years.
- Asset purchase records: until the asset is sold.
- Depreciation schedules: permanently.
- Property closing statements: permanently.
- Articles of incorporation and shareholder records: permanently.
- Annual financial statements and general ledger: permanently
What to do if you've lost or destroyed tax records
Losing tax records doesn't necessarily mean you're out of options. If documents were destroyed in a fire, computer failure, or some other unexpected event, start rebuilding your records as soon as possible.
You may be able to recover documentation by:
- Requesting copies of bank and credit card statements.
- Downloading prior invoices and receipts from vendors.
- Requesting wage and income transcripts from the IRS.
- Contacting payroll providers for employment records.
- Asking accountants or bookkeepers for copies of prior tax returns and financial statements.
If the records were lost because of a federally declared disaster, the IRS may provide additional relief or alternative documentation options.
Jessica Elliott contributed to this article.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
