As a business owner, it’s important to be aware of record keeping requirements to remain compliant with IRS regulations. Certain financial and tax records need to be kept for either 3, 6, or 10 years. Keeping accurate records also helps support figures on tax returns in case of an audit.
Why Keep Records for 10 Years?
The IRS requires tax records to be kept for 10 years from the filing date if they relate to income, deductions, and credits on your tax return. This includes records that support figures on the following:
- Business income and expenses
- Employment taxes
- Expenses related to assets
- Casualty loss claims
- Business use percentage of vehicles
Keeping records for at least 10 years allows you to verify income, deductions, credits, and other amounts on filed returns. If the IRS selects your return for audit, you’ll need to provide documentation to support your tax return figures.
What 10-Year Business Records Should Be Kept?
If you own a business, you’ll need to keep certain tax records on file for 10 years. This includes documentation on:
- Gross receipts and sales: All supporting documentation on gross receipts from sales of products or services, such as receipts, invoices, and bank deposit slips.
- Expenses: Records on operating expenses related to rent, supplies, wages, and other miscellaneous costs of doing business.
- Assets: Records related to acquiring and disposing of business assets like real estate, equipment, furniture, vehicles, etc.
- Tax returns: Copies of filed income tax returns for your business.
- Depreciation: Information detailing depreciation methods and expenses.
- Business credit and loans: Documents relating to business loans, lines of credit, and credit applications.
- Income statements: Year-end income statements showing profit or loss.
- Employment taxes: Tax records relating to payroll, FICA, and unemployment taxes.
- Independent contractor records: Documents relating to payments made to independent contractors.
What Personal Finance Records Should You Keep for 10 Years?
In addition to business records, individuals should keep personal tax and financial records for at least 10 years. This includes files supporting figures related to:
- Tax returns: Copies of your personal income tax returns.
- Income records: Pay stubs, W-2s, 1099s, and documentation of all other income.
- Investment purchases: Confirmations and statements on buying and selling stocks, bonds, mutual funds, etc.
- Retirement plan contributions: Statements and records showing IRA, Roth IRA, and other retirement plan contributions.
- HSA or MSA contributions: Documents detailing contributions to health savings accounts or medical savings accounts.
- Business expenses: Receipts and records on business-related expenses as a sole proprietor or independent contractor.
- Home purchase records: Closing statements and related documents on buying a home.
- Home improvement records: Receipts and records detailing home improvement expenses.
- IRA and retirement plan distributions: 1099-R forms and other documentation showing retirement plan withdrawals.
- Gifts: Receipts substantiating charitable contributions or gifts over $250.
- Job search expenses: Receipts for costs related to searching for a new job in your occupation.
Records That Can Be Destroyed After 10 Years
Once records are 10 years old, they can potentially be destroyed depending on the contents. However, it’s best to check IRS guidelines before shredding or deleting older tax records and documents. The following types of records may not need to be kept for more than 10 years:
- Payroll tax withholding statements
- Monthly and quarterly financial statements
- Utility bills
- Inventory records
- Credit card statements or expired insurance policies
- Fixed asset depreciation schedules
- Bank reconciliations
- Expired contracts, leases, notes receivable
- Expired stock certificates, bonds
Unless they relate to long-term transactions, assets, or tax deductions, most standard financial records can be discarded once they’re 10 years old. However, make sure to consult the IRS website or a tax professional if you’re unsure whether certain dated records should be kept longer.
3-Year Tax Record Retention Guidelines
While some tax and financial records need to be kept for 10 years, others only require a 3-year retention period. Some examples of documents that can be destroyed after 3 years include:
- Employee timesheets and payroll journals
- 1099 forms for contract labor payments
- Employment tax records
- Cancelled checks or bank deposit slips
- Purchasing department documents
- Petty cash vouchers or logs
- Sales commission reports
Unless they are needed to support tax return figures or deductions, most routine financial records can safely be discarded after 3 years.
6-Year Tax Document Retention Period
Some financial records are required to be kept for 6 years per IRS guidelines. These include documents supporting figures related to:
- Bad debts or worthless securities
- Business uniform capitalization
- Employment tax records beyond the 4-year statute of limitations
- All records where the statute of limitations was extended beyond 3 years
Unless you have specific circumstances where a 6-year retention period applies, most tax records can be destroyed following the standard 3-10 year IRS guidelines.
How Long To Keep Employment Tax Records
Employment tax records relating to your business’s payroll, retirement contributions, and health insurance should be kept for at least 4 years after the due date of the taxes or the date they were paid, whichever is later. These include records of:
- Federal income tax withholding
- Social security and Medicare taxes
- Federal unemployment taxes
In addition, you should keep all employment tax returns (such as Form 940 and 941) for at least 4 years after the due date of the return or the date filed, whichever is later. Once the 4-year mark passes, they can potentially be discarded unless required for supporting tax deductions or credits.
How Long To Retain Real Estate Records
For real estate purchases, records should be kept for as long as you own the property plus at least 10 years after disposing of it. This includes records on:
- The purchase price and purchase documents
- Property deeds
- Closing statements
- Receipts for improvements or investments
- All income, property taxes, insurance, maintenance, and expense records
- Any loss or damage records
Keep these documents for at least 10 years beyond the date you sell or otherwise dispose of the property. They help determine the accurate cost basis and documentation for any depreciation, amortization, or casualty losses when filing taxes.
When In Doubt, Keep Tax Records Longer
The IRS guidelines specify “at least” 10 years or other timeframes for keeping various tax records. If you want to be conservative, it’s smart to keep your tax records for longer than the required minimums.
There are a few advantages to retaining tax records for longer time periods:
- You reduce the risk of accidentally shredding or deleting records before the IRS time limits are up. Set reminders to review records at 10 years, 12 years, 15 years, etc.
- Your records will still be available in case of a tax audit for older returns.
- Longer retention protects you if the IRS suspects tax fraud. There is no time limit on how far back the IRS can audit in cases of suspected fraud.
- You preserve important documentation in case you need to verify tax deductions, business losses, or asset basis in the future.
Unless storage space is limited, there is little downside to retaining tax records for longer than the stated guidelines. For ultimate protection, consider keeping tax records indefinitely.
Digitize Paper Records for Easier Storage
All tax records and supporting documents should ideally be stored in a safe, damage-free environment. As paper documents accumulate over years, storage space can become a constraint.
To reduce physical storage needs, consider digitizing paper records by scanning or taking photos of the documents. Important records can be stored electronically in folders on a computer, external hard drive, or cloud storage platform. This also makes the records more accessible if you need to reference past returns.
Some tips for digitizing paper records include:
- Organize files or folders by year and document category (e.g. deductions, business expenses, tax returns).
- Give files descriptive names like “2009 Business Expense Records” rather than just “2009 Records”.
- Scan documents as searchable PDF files rather than just images.
- Consider investing in a personal document scanner with feeder to automate scanning.
- Enable automated backups so electronic copies are protected from hardware failures.
Ask Your Tax Professional for Guidance
If you have specific questions about required retention periods for certain tax records, consult with a CPA or other tax professional.
A tax expert can provide guidance on how long you should keep records based on your particular situation. For example, if you have complex business expenses, extensive assets or investments, real estate holdings, or high net worth, you may need to retain records longer than the standard thresholds.
Setting up a system for organized record keeping and retention will ensure you have access to the documents needed to verify past tax returns and deductions. Though the process takes some time upfront, thorough record keeping can end up saving you time, money, and headaches in the long run.
Conclusion
Keeping accurate tax and financial records is critical for both individuals and businesses. The IRS requires certain records to be kept for either 3, 6, or 10 years if they relate to amounts on filed tax returns.
10 years is the standard document retention period for key tax records, including income, business expenses, asset documentation, tax returns, and other figures reported to the IRS. Employment tax records often need to be kept for 4 years.
Digitizing paper records can save storage space and make the documents more accessible. When in doubt about how long to keep certain records, retaining them for longer than the minimum guidelines can provide extra protection.
Following IRS timelines for tax document retention ensures you’ll have the documentation needed if your returns are ever audited or questioned. Keeping proper records reduces stress and provides peace of mind that you can support the tax positions taken on past returns.
