Record Retention Guide

Storing Tax Records: How Long is Long Enough?

Federal law mandates that you retain copies of your tax returns and supporting documents for a minimum of three years. This three-year law often leads people to believe that retaining documents for this period is sufficient. However, there are circumstances under which the IRS can extend this timeframe.

If the IRS suspects you have significantly underreported your income (by 25 percent or more) or detects potential fraud, it may extend its audit period to six years. To ensure you are fully prepared, consider the following guidelines.

Create a Backup Set of Records and Store Them Electronically

Maintaining a backup set of records—such as bank statements, tax returns, and insurance policies—is now more straightforward, given the availability of electronic statements from financial institutions. Additionally, much financial information can be accessed online.

If your original documents are only available on paper, you can scan and convert them into a digital format. Once digitized, these documents can be downloaded to a backup storage device like an external hard drive or burned onto a CD or DVD (make sure to label it properly).

Consider using online backup solutions, which ensure your data is stored in another region of the country. This way, your documents remain secure even in the event of a natural disaster.

Business Documents To Keep For One Year

• Correspondence with Customers and Vendors**: Retain for tracking and reference purposes.

Business Documents To Keep For Three Years

• Employee Personnel Records (after termination)*
• Employment Applications
• Expense Reports
• Internal Audit Reports
• Petty Cash Vouchers

Business Documents To Keep For Six Years

• Accident Reports, Claims
• Accounts Payable and Receivable Ledgers and Schedules
• Bank Statements and Reconciliation
• Cancelled Checks
• Inventory Records

Business Records To Keep Forever

While federal guidelines do not require you to keep tax records indefinitely, there are other reasons you might want to retain certain documents forever:

• Audit Reports from CPAs/Accountants
• Canceled Checks for Important Payments (e.g., taxes, property purchase)
• Contracts and Leases in Effect
• Corporate Documents (incorporation, charter, bylaws, etc.)
• Legal Records and Correspondence
• Property Records and Deeds

Personal Documents To Keep For One Year

• Bank Statements
• Paycheck Stubs
• Utility Bills

Personal Documents To Keep For Three Years

• Income Tax Returns
• Medical Bills (if tax-related)
• Sales Receipts

Personal Documents To Keep For Six Years

• Property Records/Improvement Receipts
• Investment Statements
• Documents related to disputed items

Personal Records To Keep Forever

While you might not need to keep tax records forever, retaining the following documents indefinitely is advisable:

• Birth and Death Certificates
• Marriage Licenses
• Divorce Decrees
• Social Security Cards
• Military Discharge Papers

Special Circumstances

In specific situations, you may need to retain documents longer than the standard periods suggested above. For example, if you have engaged in activities that may trigger an extended IRS audit period, keeping records for up to six years or more may be prudent. Always consult with a tax professional to tailor record retention policies to your unique situation.