Bookkeepers and accountants are often asked how long specific records should be kept. Disposing of records that should be kept can lead to a wide range of potential tax and legal problems. But how long should the company’s files be kept? The answer varies depending on company policies and the type of files, but generally, the files should be kept as long as they serve a useful purpose or until all legal and regulatory requirements are met.
Many businesses base how long they keep records on the length of the statute of limitations for breach of contract, breach of fiduciary duty, and professional liability claims. The statutes, of course, vary with each state.
Regarding tax records, the statute of limitations period for income tax returns is generally three years but is extended to six years if there is a substantial understatement of gross income. A good rule of thumb is to add a year to the statute of limitations period. Using this approach, taxpayers should keep most of their income tax records a minimum of four years, but it may be more prudent to retain them for seven years. Regardless of the tax assessment periods, taxpayers should retain certain records for longer periods, and in some cases, indefinitely. Tax return, results of an audit by a tax authority, general ledgers, and financial statements should normally be kept indefinitely.
Shown below are some suggested record retention periods, in printable form. These should only be used as a guide. Seeking the advice of your attorney, tax accountant or business insurance carrier when establishing a record retention policy is advisable.
It is also important to note that the IRS permits taxpayers to store certain tax documents electronically. According to IRS Publication 583, “You must keep your business records available at all times for inspection by the IRS.” Business owners can keep hard copies or electronic records, as the rules apply equally to both methods. This means an electronic storage system “must provide a complete and accurate record of your data” and be accessible to the IRS.
Your system “must index, store, preserve, retrieve, and reproduce the electronically stored books and records in [a] legible format.” The IRS can penalize your company if your electronic records do not meet the requirements and you have already disposed of the paper documents.