A common question I receive surrounds how long records should be retained. Below is some general guidance surrounding several types of records.
Paper vs. Electronic Records
I personally maintain an almost completely paperless office. My tax returns, banking documents, credit card statements, etc. have never been printed, and I plan to retain everything electronically indefinitely. Below, our discussion of records retention does not mean that you have to maintain paper copies of these documents for a certain period. Having an electronic copy of the record is almost always sufficient, and is typically the best way to securely and inexpensively store your important documents.
Tax Returns
In general, never completely get rid of any tax returns. The good news is that you don’t need to have paper copies, so you can scan and shred all of those old returns. This applies to both your personal and corporate tax returns.
The reason that you never want to completely get rid of old tax returns is that the IRS may consider you to have the burden of proof to support something that originated on a very old tax return. For example, if you have a $300,000 capital loss carryover that originated 20 years ago, and you finally completely use it to offset a large gain in the current year, the IRS may ask you to prove why the capital loss carryover existed. Yes--even though you filed the original tax return to the IRS, and they should have it somewhere, they can request that you produce the document.
For tax records relating to a property, you definitely want to retain all supporting records until the period of limitations (described below) expires for the year in which you dispose of a property. For example, if you purchase a rental property in Year 1 and sell it in Year 10, you’ll need to retain all records surrounding the rental property for at least 3 years past when you file the Year 10 tax returns.
Tax Returns: 4 Years
Typically, the IRS’ statute of limitations for tax returns, meaning when they are open for audit, is 3 years after filing, so you definitely want to retain all supporting records for that period. However, the CA Franchise Tax Board has up to 4 years to challenge your tax return. Exceptions to these limits are when a tax return hasn’t been filed and in instances of fraud, in which case you’d want to indefinitely keep your records. Another exception is when you’ve claimed a loss from worthless securities or bad debt. For those tax returns, you must retain records for 7 years.
Employment Records: 4 years
Employment tax records include quarterly payroll reports (Form 941, DE 9, DE 9C) and your annual payroll reports (Form W-2, 940). The IRS suggests that employment records be retained for 4 years after the tax is due or paid.
Banking Statements: 4 years
I’m an advocate for paperless statements, which means that indefinite retention of these small files should not be a problem. Additionally, since the statute of limitations for fraud is unlimited, maintaining your banking records might help to exonerate you if those records are needed.
Day Sheets & Daily Deposit Records: 1 month
If your daily procedures include the reconciliation of daily collections against your internal accounting system (e.g. total of checks scanned, cash received), you likely have a large amount of paper piling up! The good news is that you don’t need to maintain these records in paper format. First, a record of all checks and cash deposited is already on record with the bank, so these internal reconciliations are really superfluous for purposes of records retention. However, another reason to maintain these day sheets is for purposes of prosecuting embezzlement, should you ever have the unfortunate case of an employee stealing from you. As such, I recommend scanning (and then shredding) these day sheets on a monthly or quarterly basis to keep your filing cabinets less crowded.
Receipts: See Internal Policy
You should have established an internal policy that defines which receipts should be maintained. For example, cash receipts for purchases greater than $250 and credit card purchases greater than $500. In general credit card statements will suffice to justify your expenses, so especially for purchases beneath your internal policy’s dollar threshold, you don’t need to retain the actual receipt. However, there are situations where the IRS may question the business purpose of an expense. For example, Costco sells everything, and the IRS may question the business purpose of a $1,200 purchase at the warehouse store. It’s a good idea to retain these large receipts, and sometimes even receipts beneath the dollar threshold if you think the IRS may question the business purpose. Practically speaking, this can mean snapping a picture of the receipt on your phone and then tossing the receipt in the recycling bin.
Auto Mileage Log: 4 years
If you keep track of your business mileage for purposes of reimbursing yourself, you’ve got some sort of mileage log to track these miles. It may be in the form of an app which tracks business trips, or a written or electronic log you keep. Keep this log so long as your tax returns are still open to inspection, so for at least 4 years from when the corresponding tax return is filed.
Dave Sholer, CPA, MBA works exclusively with dentists in California, offering full-service accounting & tax solutions for dental practices of all sizes.
Want more info? Dave offers a no-cost, zero obligation consultation to answer whatever questions you have and/or to review your books, tax returns, and payroll situation. He will answer any specific questions you have regarding your own retention of records situation.