Understanding the Duration for Keeping Tax Records
The Rule of Thumb: Better Safe Than Sorry
According to federal regulations, it’s mandatory to keep copies of your tax returns and related documents for a minimum of three years. This requirement, commonly referred to as the “three-year law,” often leads to the misconception that keeping records for this duration is always sufficient. However, it’s advisable to convert these documents to digital format, which can be stored on devices like external hard drives or CDs/DVDs – remember to label them clearly. In the digital era, backing up records electronically is simpler, thanks to the digital availability of documents like bank statements and insurance policies. Opting for online backups ensures your data is stored remotely, safeguarding it against natural disasters.
Protecting Yourself from Identity Theft
These days, the threat of identity theft looms large, necessitating utmost caution in handling personal documents. Once your tax records and financial documents are no longer needed, it’s crucial to dispose of them securely – shredding is recommended over merely discarding them in the trash.
Extended Retention in Special Cases
Be aware that if the IRS suspects underreporting of income by 25% or more, or fraud, they may audit up to six years back. Thus, it’s prudent to follow specific guidelines for document retention:
Business Documents: Duration of Retention
- One Year: Correspondence with customers and vendors, duplicate deposit slips, non-purchasing department purchase orders, receiving sheets, requisitions, stenographer’s notebooks, and stockroom withdrawal forms.
- Three Years: Post-termination employee records, employment applications, expired insurance policies, general correspondence, internal audit and reports, petty cash vouchers, physical inventory tags, savings bond registration records of employees, and time cards for hourly employees.
- Six Years: Accident reports, accounts payable and receivable ledgers and schedules, bank statements and reconciliations, cancelled checks and stock/bond certificates, employment tax records, expired contracts and leases, inventory records, invoices, payroll records and summaries, purchasing department copies of purchase orders, sales records, subsidiary ledgers, time books, travel and entertainment records, vouchers, and voucher register schedules.
Special Circumstances Documents
- Until Specific Events: Keep car records until the car is sold, credit card receipts with your statements, insurance policies for their duration, mortgages/deeds/leases for six years beyond their terms, pay stubs until W-2 reconciliation, property records and improvement receipts until the property is sold, sales receipts for the warranty period, stock and bond records for six years post-sale, and warranties and instructions for the product’s life.
- Other Documents: Keep other bills until the next bill confirms payment, and depreciation schedules and other capital asset records for three years after the tax life of the asset.
Personal Documents: Suggested Retention Periods
- One Year: Bank statements, paycheck stubs (reconcile with W-2), cancelled checks, and mutual fund and retirement contribution statements (reconcile with the year-end statement).
- Three Years: Credit card statements, medical bills (for insurance disputes), utility records, and expired insurance policies.
- Six Years: Documents supporting tax returns, accident reports and claims, tax-related medical bills, property records/improvement receipts, sales receipts, wage garnishments, and other tax-related bills.
Records to Keep Indefinitely
- Personal Records: CPA audit reports, legal records, important correspondence, income tax returns, income tax payment checks, investment trade confirmations, retirement and pension records.
- Business Records: Even in the absence of federal mandates to retain certain tax records indefinitely, there are compelling reasons to do so, such as audit reports from CPAs/accountants, cancelled checks for significant payments, cash books, charts of accounts, current contracts and leases, corporate documents (incorporation, charter, by-laws, etc.), documents substantiating fixed asset additions, deeds, depreciation schedules, year-end financial statements, ledgers and trial balances, insurance records, IRS agents’ reports, journals, legal records, minute books of directors and stockholders, mortgages, bills of sale, property appraisals, records, retirement and pension records, tax returns and worksheets, and trademark and patent registrations.
This comprehensive guide on tax record retention aims to help you navigate the complexities of document management, ensuring compliance and peace of mind. Remember, it’s always better to retain a document than to discard it prematurely.