So you’ve completed your tax return and are moving your files to the back storage room, closet, garage, or other archival space. The boxes start piling up. You’ve probably asked yourself, “How long should we keep these records?” It would be great if you could ascribe to the old adage, “out with the old, in with the new.” However, it’s important to hang on to your financial records for a little while longer than you would think.
Per the Internal Revenue Service, you should keep tax returns and supporting documentation for at least three years from the date you file the return; however, the statute of limitations for the Franchise Tax Board is generally four years from the date you file the return. So, if you file your 2011 tax return on April 17, 2012, you should keep your records until at least April 17, 2016. But, the IRS has up to 6 years to audit your return if your income is under-reported by 25%. If you claim a loss from worthless securities or a bad debt deduction you should keep the records at least 7 years, and there is no statute of limitations if you don’t file a return or file a fraudulent return. In general, most experts recommend that you keep financial and tax-related records at least 7 years as a conservative estimate.
Per Social Security Administration (SSA), “In light of the current budget situation, we have suspended issuing Social Security Statements.” You may able to estimate your retirement benefit using the SSA’s Retirement Benefit Estimator. However, as of the date of this article, it appears that you cannot get an earnings history on paper or online (although your earnings are in the system). There are plans to resume sending statements in the future, but only to people 60 and older. Therefore, it appears you should permanently keep your W-2s and tax returns that support your social security earnings.
You should keep documentation related to property, such as closing statements and support for major improvements, at least four years subsequent to the year in which you dispose of the property and recognize a gain or loss. Also documentation that may relate to income or a deduction for future tax years, such as installment sales, depreciation and amortization records, and various loss carryforwards, you’ll want to keep at least 7 years after they have been fully utilized or expired.
For further information, refer to IRS Publication 552 or the Franchise Tax Board “Keeping Records” webpage. You don’t need to keep paper copies; the IRS allows electronic documentation, so you can scan (our personal favorite: Fujitsu ScanSnap Scanners) your documentation and save to an accessible CD, flash drive, or on a secure, cloud-based document management system, such as ShareFile or Dropbox.
There are other business-related documents, although not all specifically related to a tax return, that you should keep permanently for your business for legal or insurance purposes. This suggested permanent file list is not all-inclusive. You may want to consult with your attorney or insurance agent for documentation specific to your business.
Type of Document | Type of Document |
Annual reports and financial statements | Insurance policies |
Articles of Incorporation or Organization | IRS notice of tax ID and tax determination |
Capital stock certificates and stock ledger | Lease agreements |
Charters, constitution, bylaws & amendments | Licenses & permits to do business (federal, state and local) |
Claims & litigation of torts & breach of contract | Minutes of Board of Directors meetings |
Copyrights, patents and trademarks | Mortgages and other loan agreements |
Deeds and titles | Payroll and personnel records |
Depreciation schedules | Stock, stock transfers & stockholder records |
Although these recommended document retention timelines may be longer than you expected, you’ll want to easily and readily be able to substantiate any tax or financial-related issues in an audit, legal or insurance matter, so it’s worth the effort to organize and maintain these files. If you have any questions about specific documentation, please contact us.
REFERENCES:
Internal Revenue Service:http://www.irs.gov/businesses/small/article/0,,id=98513,00.html
How long should I keep records? | ||
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Page Last Reviewed or Updated: September 01, 2011
California Franchise Tax Board: https://www.ftb.ca.gov/businesses/keeping_records.shtml
Keeping Records
What kind of records should I keep?
In the operation of your business, you will come across many types of records related to your income and expense transactions. While it is impossible to list all the records for every possible transaction, following are some examples of records to maintain:
- For gains and losses reported on Schedule D such as sale of real estate or securities, you will need documents to verify the sales price, the cost of the asset you sold plus improvements if any, e.g. sales and purchase agreements, escrow papers, copies of checks, brokerage statements, etc.
- For general expenses, you must be able to document the type of expense, the date and amount of payment, copies of cancelled checks, and that it was incurred in the operation of your trade or business.
- For revenue/income items, you should keep copies of 1099’s, sales invoices, sales agreements or contracts, etc.
There are two methods of filing tax returns: paper and electronic. Both require similar recordkeeping.
- Summary of your business transactions.
- Books and records that support your income, deductions, and credits. This might include journals and ledgers, as well as cash register records, sales records, bank statements, W-2’s, 1099’s, invoices, cancelled checks, sales agreements, etc.
- For more information regarding e-file, please see Individual e-file Frequently Asked Questions and Business e-file for Tax Professionals.
How long should I keep records?
The Franchise Tax Board (FTB) may request information regarding your California income tax return within the California statute of limitations period, which is usually the later of four years from the due date of the return or the date the return is filed. (Exception: an extended statute of limitations period may apply for California or federal tax returns that are related to or subject to a federal audit.)
Keep a copy of your return and the records that verify the income, deductions, adjustments, or credits reported on your return. Some records should be kept longer. For example, keep property records as long as they are needed to figure the basis of the property. In transactions relating to Abusive Tax Avoidance Transactions:
- For notices issued prior to August 1, 2011: FTB has 8 years after a taxpayer files a return to mail a proposed deficiency assessment. Therefore, tax documentation should be kept for at least 8 years.
- For notices issued beginning August 1, 2011: FTB has 12 years after a taxpayer files a return to mail a proposed deficiency assessment. Therefore, tax documentation should be kept for at least 12 years.
Why should I keep records?
Good records will help you do the following:
- Determine whether you are making or losing money and why.
- Prepare your financial statements.
- Identify and categorize sources of revenue.
- Keep track of deductible expenses.
- Prepare your tax returns.
- Document your expenses and transactions in case of an audit.
What is the “Burden of Proof” if I ever need to provide proof of income and deductions claimed on my tax return?
The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, cancelled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.
How should I record my business transactions?
Business transactions are ordinarily summarized in journals and ledgers; many of them are in computer software format.
A journal is where you record each business transaction. You may have to keep separate journals for transactions that occur frequently, such as a sales journal, a payroll journal or a check disbursement journal.
A ledger is where you record the totals from all of your journals. It is organized into different accounts.
Whether you keep journals and ledgers depends on the type of business. For example, a recordkeeping system for a small business might include the following items:
- Business checkbook
- Daily summary of cash receipts
- Monthly summary of cash receipts
- Cash & Check disbursements journal
- Depreciation worksheet
- Employee compensation records
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