Rules of Record Retention
Clients often ask how long they need to keep particular records. The answer is not as clear-cut as one may think. In general, the records should be kept for as long as they may be needed for federal and state tax returns, or for other possible legal reasons.
Records supporting an income or deduction item on a filed tax return need to be kept until the Period of Limitations runs out for the return. This is the period of time in which a return may be amended or a claim for credit or refund may be filed. More information can be found in IRS Publication 583.
Other business and personal records must be kept for a period of time after they are no longer needed. It should be noted that similar documents and records may be subject to different record retention rules. For example, employee records should typically be kept for seven years. However, for an employee’s personnel records, the seven-year clock begins ticking after termination.
There are many business documents, and they are subject to a variety of retention years. Several online websites offer retention guidelines; however, they may not be updated with the most current retention regulations. Please use this table as a general guideline.
Here is another good example. A recent IRS audit, high priority goal, is for S corporation shareholders to prove their stock basis. This could entail keeping records of capital contributions and the related canceled checks going back literally decades. So be careful what you throw away!
Fortunately, the IRS allows for the use of electronic storage of records. The storage requirements that apply to hard copy systems apply to the electronic storage system as well. The files and documents must be indexed, stored, preserved, and retrievable in a legible format. More information can be found in IRS Revenue Procedure 97-22.
Whether hard copy or electronic, hanging on to unnecessary records will fill up storage and cost money. A records management program, which includes state and federal retention schedules, will help alleviate excess and maintain control of your records. Contact the experts at KT with any record retention questions, we are always here to help.