A common question around the office involves records retention. Many people think they need to keep their tax returns for seven years, others think it is three; both are wrong.

Tax returns are not the only records you need to consider when building a record retention policy in your business and personal life. Some items can safely be disposed after one year; some items need to be kept forever—your estate can handle disposal.

Record retention in the past required filing cabinets filled with papers. The filing cabinets can be—and should be—replaced by digital storage. A fire, theft or weather damage put irreplaceable documents at risk when stored in a filing cabinet. A better solution is to scan all documents into a digital filing cabinet and store a backup copy offsite.

Most banks already provide digital copies of statements and your tax preparer should have no problem providing a digital copy of your return. Your tax preparer is required to provide you with a copy of your tax return and it can be a digital copy. Have your accountant email you a copy or bring a flash drive to their office. Also, many accountants have secure drop boxes built into their website now. For security reasons you may wish to use this method over less secure email. Plus, emails are easier to subpoena for court proceeding.

Security is the biggest concern when storing records. The amount of documentation held by a business is huge. Even a modest household can accumulate a serious amount of paperwork they must retain. Digitizing data is fast and simple. Security of this “fast and simple” data is important because it is just as “fast” and “easy” to steal it. Storing data at home or business should be secure behind adequate firewalls, encrypted and password protected. Offsite storage must be with a reputable firm safeguarding your data. The cost of storing data is cheaper than ever so there is no reason not to keep all required documentation and store these records safely.

Below is a handy guide for determining how long you need to keep records. I have added a few notes after some items to clarify certain requirements. It would be a good idea to bookmark this page for future reference. I list personal requirements separately from business requirements. To simplify your search I have listed items by 1 year, 3 years, 6 years, forever, and special circumstances.

It should be noted state requirements can differ from federal requirements. I follow the records retention list with special rules affecting certain states. People filing a tax return, conducting business or own property in these states will need to consider additional records retention issues.




Personal Records/Documents

One Year:

Bank statements

Paycheck stubs once you reconcile with your year-end W-2

Mutual fund and other monthly or quarterly statements once reconciled with the year-end report

Cancelled checks

 

Three Years:

 

Credit card statements

Utility bills

Expired insurance policies (three years after expiration of the policy)

Medical bills, in case there is a dispute

 

Six Years:




 

Tax return supporting documents

Any tax related bills/payments

Medical bills claimed on a tax return

Wage garnishments

Sales receipts (ie. sale of an auto or personal items) and for purchases

Property records and improvements (additions to basis) (see Special Circumstances below)

Accident reports and claims

 

Forever:

 

Tax returns: The IRS requires you keep a copy of your tax return and supporting documents for a minimum of three years. Under normal circumstances the IRS can audit and assess additional taxes up to three years from the due date or the date filed, whichever is longer. However, if you understate income by more than 25% the IRS has six years to assess additional taxes. Many states extend this limitation. Therefore, tax returns should be kept forever. (I make a special exemption to this rule for tax returns from decades past if the returns had only wage income.) Always retain tax returns that list basis for nondeductible IRA contributions.

 

IRS and accountant audit reports

Legal records

Tax payments

Important correspondence

Investment trade confirmations

Retirement/pension records

 

Special Circumstances:

 

Depreciation schedules should be retained for the life of the property, plus three years (more in some states)

Bills should be kept at least until payments are reconciled on the next statement

Warranties should be kept for the life of the product; instructions, too

Investment (stock, bond, mutual funds, et cetera) records until sale of the asset, plus six years

Sales receipts for the life of the asset, especially the term of any warrantee, including extended warranties purchased or offered free by the credit card used to purchase the item.

Property records and improvements and additions until the property is sold, plus six years

Keep paystubs until W-2 is received. Reconcile the paystubs with the W-2. Stubs can then be discarded

Mortgages/leases/deeds et cetera should be kept for six years after the term of the document

Keep insurance policies for the life of the policy, plus three years in case a late claim is discovered

Car records: Keep until sold, plus two years

Credit card receipts should be kept with statements. The nature of the expense will determine how long it should be retained




Business Records/Documents

 

One Year:

 

Most correspondence with customers and vendors. Certain industries require longer holding periods: investment advisors, accountants, tax preparers and attorneys are a few examples

Stockroom forms

Receiving paperwork

Duplicate deposit receipts, especially once reconciled with the statements

Purchase orders, except for Purchasing Department copy

Requisitions

Stenographer notebooks

 

Three Years:

 

Employee personnel file for three years after termination

Employee time cards

Employment applications

Expired insurance policies

Most general correspondence, except for requirements for certain professions

Internal reports and internal audits

Petty cash log

Inventory tags (inventory list is the same term as tax returns)

Miscellaneous employee records such as Savings Bond registration records

 

Six Years:

 

Accounts Payable and Accounts Receivable logs

Accident reports and claims (Worker’s Compensation and other general liability claims)

Banks statements and reconciliations

Cancelled checks

Cancelled stock and bond certificates (Since a corporation has continuity of interest, forever is a long time. Six years is a minimum for retention of cancelled stock and bond certificates.)

Employment tax records (Forms 940, 941, state employment tax forms et cetera.)

Expense logs and records

Expense analysis and distribution records, including employee expense accounts and per diems

Expired contracts and leases

Inventory records

Customer invoices

Notes receivable records

Payroll records, including pension and other payroll payments

Purchasing Department purchase order records

Plant cost records

Sales records

Time sheets

Subsidiary reports and ledgers

Travel & Entertainment records (This is the one area of taxes where you cannot rely on Cohen’s Rule to estimate expenses. No receipts, no deduction.)

Vouchers, voucher register, payments to vendors, et cetera

 

Forever:




 

Many documents should be kept longer than required by the taxing authorities. Businesses should consider longer term retention of tax documents for a variety of reasons, including legal matters.

 

IRS and accountant audit reports

Cancelled checks for important payments, ie. tax payments

Cash books and Chart of Accounts

Contracts and leases, especially while in effect

Corporate documents should all be kept forever

Substantiation of fixed assets, improvements and additions

Deeds

Depreciation schedules

Year-end financial statements

General and private ledgers, plus year-end trial balance worksheets

Insurance records, accident reports, claims, et cetera

Investment trade confirmations

Journals

Legal records

Minute books of Directors and Stockholders

Mortgages, Bills of Sale

Property records

Property appraisals from outside appraisers

Retirement and pension records

Tax returns and worksheets

Trademark and patent registrations

 

State Records Retention Issues

Some states have different document retention requirements from federal.

Arizona, California, Colorado, Kentucky, Michigan, Ohio and Wisconsin extend the federal statuette by a year, allowing time to assess additional taxes from a federal audit report. These states have four years to assess additional taxes as a result. Note that Wisconsin will consider additional tax assessed once an IRS audit report is received by the IRS even if it takes them years to finally assess the tax.

Kansas can assess additional tax three years from the due date, the date you actually file or the date of final payment, whichever is longer.

Louisiana and New Mexico extend assessment until December 31st of the third year after the return was due.

Minnesota extends the ability to assess for three and a half years from the due date or the time of actual filing, whichever in longer.

Oregon has three years from the filing date to assess additional taxes.

Tennessee has three years from the due date or filing date (whichever is longer) to assess additional tax. If you claim a refund, Tennessee has three and a half years and five years if the IRS made adjustments to the return.

Statute of Limitations (SOL) to Collect

The federal government generally has 10 years to collect a delinquent tax from the due date or the date of actual filing, whichever is longer. The SOL clock stops while certain actions take place, such as consideration of an Offer in Compromise. A good rule of thumb is if the IRS is banned from collection activities the SOL clock stops during that time period. In effect, the IRS gets a full 10 years to collect from you while they are allowed to collect. You can order a transcript (Form 4506-T) from the IRS to see when the 10 year SOL to collect expires.

As if this isn’t complicated enough, each state has SOL to collect rules. A few states, like Wisconsin, Pennsylvania, Oregon, Rhode Island, et cetera, have no SOL to collect. Generally these states will have Offer in Compromise programs available to bring tax issues to a close. Rather than repeat all the state rules, you can review some of the state SOL rules here.

My practice’s website has an abbreviated version of this post. Special thanks to The Kiplinger Tax Letter and WalletHub for information in this article.

Please list any corrections in the comments section. The federal issues are current, but as time goes on things can change. The states all have different rules. Sharing your knowledge of a specific state’s rules will help readers. I will update this post as information becomes available and time permits.