Record Keeping

I apologize for the long absence of any new content on this blog; however, I took a hiatus during tax season and have had a tough time getting back on track.  In any event, a client of mine recently raised a question which I believe may be relevant to many of you – how long should I keep my records?  If record space is a concern for you consider the following:

Generic tax rules

  • Keep all tax (or potential tax) records for three years from the later of April 15 (after the tax year) or when the original tax return was filed or after an amended tax return was filed.
  • Keep records for 7 years if you filed a claim for a loss from worthless securities or bad debt deduction on the tax return.
  • Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return. Yes the statute of limitations is extended if there is an understatement of tax in excess of 25%.  Hard to know what you don’t know but I assume this does not apply to any of you?
  • Keep records indefinitely if you do not file a return. If you didn’t file because you were below the filing thresholds, this should not be much of an issue.
  • Keep records indefinitely if you file a fraudulent return. Yes the statute never runs out if you commit fraud so please don’t do that!
  • If you have a business with employees you should keep employment tax records for at least 4 years after the date that the employment tax becomes due or is paid, whichever is later?

Special tax records

  • Bank and brokerage statements – treat these all as tax records even if you consider them non-business accounts because during an audit the taxing agencies will want to review all of your deposits to ensure that they match your tax returns and/or that you can explain any non-income deposits.
  • Business property records and personal residences – these records, including purchase records and records of improvements made, should be kept until the period of limitations (generally three years as noted above) expires for the year in which you dispose of the property.
  • Pension and IRA records – if you have any tax basis in the plan, you should keep those records for 7 years after the assets are fully depleted.
  • Human resource files –  this is a very sensitive area and files relating to current employees should be retained while they are working for you and for at least 7 years after a current or former employee has left or been terminated. For any job applicants who were not eventually hired, keep these files for at least 3 years. If an employee has suffered an accident on the job, consider retaining those records for at least 7 years after that matter was finally resolved or up to 10 years after which any workers compensation benefits were paid. If an employee lodged a discrimination claim against your business, consider retaining those records for at least 4 years after the case is finally concluded. Think about keeping records of employee benefit, pension payment or profit sharing plans permanently.

Non-tax records

  • Credit card statements – some will suggest that credit card statements should be kept for at least 7 years. However, if the charges were not business related, I don’t see that they need to be kept for so long. Keep business charge records long enough to ensure that all vendor charges may be substantiated, if necessary.
  • Insurance policies – these must certainly be kept at least as long as the policy is in force and probably a few years longer. Note also that insurance companies may have their own requirements as to how long certain related records should be kept so be sure to check with your insurance agent on that.

Other storage options – if you have a hard time letting records go, another option is to scan (or download) your records and store them in a secure and backed up place on your computer network.

  • Scanners – for scanners, I recommend a sheet feed system rather than a flat-bed (included with most printers). There are a number of good ones available for under $500.
  • Backup – for home backup and cloud access I highly recommend that you utilize a cloud backup system such as Drop Box, Sugar Sync, or Carbonite.  These will generally cost you from $5 to $7 per month and are easy to use while allowing access to your documents (and photos) from anywhere.

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