Just the other day, I had a client ask me about records retention.  And, as I prepared to answer her query,  I realized that a lot of you probably have the same questions.  So….

How long should you keep your business records?  The answer is forever.  (We say forever because if you really make a big thing of your company, you are going to want to have the history to share with others.   But, that has nothing to do with IRS requirements.) And, we both know that’s not how long you’re prepared to keep them.  So, let’s set some parameters.

I am of the firm belief that you should be scanning every single bill that vendors and suppliers send you.  You can either sort them by vendor or by month.  But, we prefer saving them by vendor and naming the document with the date and invoice number.  (14 Dec 15 A10245 would be an example.)  And, you keep each year separate.  (We also transfer each year’s data to a DVD, along with invoices sent to clients and expense reports for posterity.  We’ll talk about how long to save the DVD’s in a bit.)

The rules for keeping documents is basically to keep each item until the statute of limitations for each item expires.   That means you need to know how much time lapses before filing an amended tax return will not be accepted or until the IRS can no longer demand you produce your documents and assess additional taxes.

So, that means one date is set.   The dates begin on the DAY your filed a tax return.  If you are a corporation, and you did not request an extension, the due date for Calendar Year 2014 was 15 March 2015.   That’s the date we begin using for 2014 finances.  (If you filed an extension and waited until the last minute to file, that changes the date to 15 September 2015.)

The IRS claims your tax returns need to be saved for three years.  That means, given the case above, until 15 March 2018 or 15 September 2018.  UNLESS…You failed to include all your income on the report, you failed to file a tax return for that year (this is where forever becomes the law- which is why we tell EVERYONE to file a tax return, even if no taxable income is generated or taxes are due.   It saves your sanity.) If- G0d forbid- you filed a fraudulent tax return, forever is the requirement, too!

If you didn’t include all your income (why the heck not? by the way), you have to keep that year’s tax return for six (6) years. But, if you failed to include enough income that you owe a lot more taxes, you should file an amended tax return.  Because the penalties and interest if you are caught will be substantial.  And, you can bet the IRS will audit several years of your taxes should they suspect this to be the case. (The IRS says you should keep your tax returns for 6 years if you failed to include significant income.   Again- we suggest you file an amended tax return.)

In addition, if you failed to pay the entire tax when you filed your return (which means you developed a payment plan with the IRS), you must keep your return for 2 years from the date of the last payment and your tax bill was paid in full.  (Unless that happens before the three year general requirement lapses.  You use the later date always.)

If you filed a claim for bad debts or worthless securities, the retention period of 7 years is required.

However, if your business owns property?   (This also applies to personal residences, by the way.)  The starting date for the period begins the year in which you disposed of the property.  (No, that does not mean the year the depreciation reached ZERO, but the year you no longer owned the item or real estate.) This requirement covers computers, printers, homes, offices, furniture- whatever.

Payroll records- especially payroll tax filings (941, 944, 940, W-2, W-3 and state filings)- should be kept for four (4) years after the tax was paid in full.  That really means 49 months after the end of the calendar year, unless you failed to pay your obligation in full; then it’s 4 years from the time you finally paid your debt.

Those DVD’s you made with the invoices and bills and expense reports?  They can be destroyed (and I do mean destroyed- cut them at least in quarters) using the same time periods as above.

Those are the IRS required rules.  However, we really believe you should keep your records for 7 years from the date of filing. Because, if the IRS decides you have a pattern of abuse (underreporting income, fabricating expenses, misclassifying employees as 1099s, etc.), they will want to go back up to 7 years.  And, if you have no records, then their calculations (you know those numbers as WAGS- wild ass guesses) win out.   And, you have no recourse.

Aren’t you glad that scanners are now de rigueur?  No need for those 200 file cabinets!

Share this: