Records Retention – What Should You Keep and How Long
Many use the beginning of the new year to clear old records. Businesses and individuals should give careful consideration to what documents to retain in the event of an IRS audit prior to tossing them in the shred bin.
When you e-file your tax return, you’re generally not required to send in any of your tax documentation along with your return, so it’s pretty easy to lose, misplace, or simply throw away W-2s, 1099s and other supporting documents. However, in the event of an audit, you’ll need to have the proper documentation available, or you could find yourself on the hook for more taxes, simply because you can’t prove that you’re entitled to the deductions and credits you claimed.
If you claim business expenses on your tax return, the IRS requires you to keep supporting documentation that shows what you bought, how much you paid, and when you bought it. If they have any questions about your return or your tax return gets audited in the future, these records will substantiate your deductions. Businesses with employees are also subject to payroll record retention requirements.
The 3 Year and 6 Year Rules
At minimum, keep tax records for as long as the IRS has the ability to audit returns or assess additional taxes, which generally is three years after filing.
However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So, a common rule of thumb is to save tax records for six years from filing, just to be safe. If you are cleaning out the file cabinet at year-end and filed your return by the regular or extended deadline, this means many records can be shredded 7 years subsequent to the end of the calendar (or fiscal) year.
Certain documents, including tax returns, W-2s, and IRA or other retirement-related documents should be kept indefinitely. Our records retention guide, found here, provides for some of the most common tax-related records documents. If you have questions about other documents, please give us a call.