How long to keep tax records

Keeping your tax records intact and storing them over a period of time is a critical component of ensuring that you remain compliant with related legislation. Tax rules also impact on employees, investments, and a range of other areas. But keeping on top of this issue can become logistically difficult. So in this article, we will assess how long you should hold on to your tax records.

Period of limitations

The rules related to tax records vary from country to country, but in the United States, you should keep tax records according to a period of limitations. The period of limitations refers to the timeframe in which income, deductions, and credits are legally applicable. Various periods of limitation apply, depending on the scenario.

What can be said for certain is that it's important to keep tax records for at least three years, regardless of circumstance. A three-year period is the minimum statute that applies. Under the IRS statute of limitations, if you do not file a claim for a tax refund, you will have three years from the date that you filed to submit a claim. This then equally applies to the IRS making a claim against you.

Statute exceptions

While the three-year rule is broadly applicable, there are also several exceptions. You should maintain tax forms related to retirement accounts, such as IRAs, for seven years after the account has expired. This period similarly applies to a claim for worthless securities or bad debt deductions. Tax issues related to the purchase, sale, or depreciation of property also operate under different statutes of limitations that expire the year in which you dispose of the property.

Other rules may require you to keep tax records for more than three years. For example, if you omit more than 25% of your gross income from your return, the IRS can request your details for six years following this submission. Note that in the ill-advised scenario that you fail to file a tax return, the statute of limitations will never expire. It is advisable to avoid both under-reporting and failing to report, but if you do find yourself in this situation then understanding the consequences is essential.

You should also note that in the United States, such statutes of limitation are also subject to state legislation. Some states can look further back than the federal IRS. California and Arizona have four-year statutes of limitations, while Montana stretches this period to five years. Differences between states can also impact the period of investigation related to the under-reporting of income by businesses or due to other circumstances. Always check with state tax authorities in order to clarify your specific circumstances.

Required documents

What documents do you need to keep in order to comply with tax regulations? Essentially, your personal circumstances will dictate what you keep. Employees need to save records that support the figures entered on the documents submitted to the IRS. These documents will include W-2 1099 forms that you receive directly from employers and 1099-V or 1099-INT documents received from banks, brokerages, and other investment firms.

If you have received welfare during the financial period, it is also important to hold on to your 1099-G form, which is used to report the amount of unemployment benefits you received. The US government previously provided a tax exemption of $10,000 of unemployment income, or $20,000 for married couples that file jointly. But unfortunately, this exemption expired in 2021, so today all unemployment benefits are subject to taxation.

When dealing with itemized deductions, keep receipts for credit card and other purchases, invoices, mileage logs, and canceled checks. If you purchase or sell mutual fund shares, stocks, or other securities or investment instruments, you will need confirmation slips and brokerage statements indicating how much you have invested and how much you received when they were sold. Similarly, keep a copy of all investment receipts for at least three years after they have been sold.

Bank statements

Retaining bank statements is also important because they provide a record of all company transactions that can then be compared with submitted tax records. Typically, you should retain bank statements for at least three years, in line with IRS requirements. However, experts argue that you should retain bank statements for seven years because this longer period helps cover a business against virtually all possible scenarios related to tax investigations.

Retaining financial records after death

Because the statute of limitations for taxes is three years, a deceased person's tax returns can be subject to review for three years following their passing. However, anyone with next-of-kin responsibilities should retain tax documents for the full seven-year period because issues with the deceased person's returns may crop up at a later date.

Again, this time period for saving records is a broad guideline that can vary from one state to another. Different countries have their own regulations. For example, in the United Kingdom, HM Revenue and Customs has the legal right to request records for up to 20 years after Inheritance Tax is paid, which can therefore impact the length of time a person should retain documents.

Property regulations

The sale of properties also attracts tax regulations. You will require a record, along with proof, of what was paid for the property initially and how much money you received from its sale. The IRS requires records required in relation to rental properties, particularly the amount of money invested in the property during your ownership of it along with deductions made for depreciation. Most accountants recommend keeping the Schedule-E form that is filled out annually for rentals until the property is sold.

Healthcare rules

Accountants also recommend keeping records of all healthcare insurance coverage, for both yourself and family members. Anyone claiming the premium tax credit – a refundable tax credit intended to assist lower-income families to acquire health insurance – will also need to provide information regarding credit payments that have been received through the Health Insurance Marketplace, along with related premiums. Across all of these areas, no standardized form of bookkeeping is legally required. But you must utilize a method of record keeping that clearly and accurately reflects your gross income and expenses. All records and receipts that you keep and potentially provided to the authorities must substantiate all of your income and expenses. Furthermore, if you have employees, you are required to retain all employment tax records for at least four years after the tax becomes due, or is paid – whichever of these two dates is the later.

How long should I keep business records?

Business records are subject to separate regulations, and the IRS has established a set of rules for keeping records. Businesses should keep tax returns and supporting records until files can no longer be audited, that is, for three years. This timeframe can be extended to six years if a “substantial error” is associated with a return, so keep this point in mind as you retain records.

Keep other business records, such as timesheets and those related to wages, pension payments, and tax deposits, for at least four years after the date the taxes were due. The IRS recommends employee files be retained for seven years, although this figure can increase to ten years if an employee has suffered an accident or files a claim against your business.

All service records related to accountancy and operational records, including bank account statements, credit card statements, cash receipts, and canceled checks, should be retained for seven years.

The IRS also recommends that businesses retain the following document types:

• business formation documents

• tax returns and supporting documents

• employment records

• sales receipts

• business asset records

• ledgers and registers

• leases or mortgage documents

• shareholder meeting minutes

• bank and credit card statements

• licenses and permits

• insurance policies and records

• loan documents

Finally, you should keep several types of documents permanently. These include business formation documents, corporate by-laws, annual reports, shareholder meeting minutes, and business licenses. These documents can assist you in explaining to tax authorities the actions that the business has taken should the company be liquidated or otherwise dissolved.

Organization of documents

It's also important to keep your tax records as tidy and organized as possible. Ensuring that your documents are in order will make the process easier should the Internal Revenue Service have questions about your tax filing. It is therefore important to stay on top of what needs to be kept, since hoarding every document will inevitably lead to disorganization. Business owners and self-employed people who keep too many documents often struggle even more than those who don't keep enough because they find themselves rifling through drawers of old papers that cannot be properly sorted.

Therefore, develop an efficient record-keeping system and stick to it. The IRS has no standards or requirements for how documents should be filed or organized, but the revenue services does have expectations that companies will be able to deliver documents promptly. The IRS offers assistance with this issue via Publication 552, which provides detailed advice on precisely which records you should keep.

Storing digital records

The option of digitally storing tax records is also readily available now. Different platforms can assist with this process, and digitally storing tax records has become increasingly popular. But you mustunderstand the pitfalls associated with digital tax record keeping. Ensure that your online storage is encrypted so that your data can't be easily stolen by cybercriminals. Inevitably, tax records include Social Security numbers and other identifying data, so you must store all material securely.

However, if you successfully manage the process of storing digital records, then you can declutter your office or workspace. By reducing paper records, you can help improve the organization of your operation. It's also worth noting that the IRS keeps records of all previous tax returns, so they can be requested online and then kept in digital form with your overall records.

While accountants can play a role in preparing documents for tax purposes, it is not advisable to rely solely on certified professionals. Taxpayers should always maintain copies of tax returns and related documents because ultimately, they are legally responsible for their own taxes. It is increasingly possible to scan documents and place them in the cloud, but physical copies remain equally legitimate.

Importance of security

Finally, when it comes to disposing of your tax records, it's important to remember that they remain a security risk. Identity theft based on tax documents is entirely plausible, so you must ensure that all documents are disposed of responsibly. Paper documents should be shredded, while electronic records should be deleted permanently once they become obsolete. When retaining documents, whether paper or electronic, you should keep backups, and all digital files should be encrypted.

When it comes to storing tax records digitally, NordLocker is an ideal solution. NordLocker allows you to store and sync company data privately, while your data is securely backed by top cryptography algorithms. Our secure file storage ensures that your records are protected, backed up, and always within reach. We also offer a 14-day free trial and 30-day money-back guarantee. NordLocker is the ideal tool for ensuring that all of your tax records are accessible and secure.