How Long Should You Keep Tax Returns and Financial Records?

Good recordkeeping is one of the most important parts of managing your finances, whether you're a business owner or an individual taxpayer. Keeping the right documents for the appropriate amount of time can make tax filing easier, support deductions if you're audited and provide valuable information when selling property or applying for financing.

On the other hand, holding onto every piece of paper forever can create unnecessary clutter and make important documents harder to find.

The IRS Statute of Limitations

The amount of time you should keep tax records often depends on the IRS statute of limitations. In most situations, the IRS has three years from the date you file your tax return to assess additional taxes. Because of this, many tax professionals recommend keeping tax returns and supporting documentation for at least three years after filing.

However, there are important exceptions:

• If you underreport your income by more than 25%, the IRS generally has up to six years to assess additional taxes.
• If you file a fraudulent return or fail to file a return altogether, there may be no statute of limitations.
• If you claim a loss from worthless securities, bad debts or certain other deductions, records may need to be retained longer.

These exceptions mean that while three years is often the minimum recommendation, many individuals and businesses choose to keep tax returns for at least seven years to provide an added layer of protection.

Payroll Records for Businesses Require Longer Retention

Business owners are generally required to retain payroll and employment tax records for longer periods than many other financial documents. These records may include:

• Employee timecards
• Payroll registers
• W-2 and W-4 forms
• Tax deposit records
• Employment tax filings
• Benefit deductions

Maintaining organized payroll records helps employers respond to government inquiries, resolve employee questions and demonstrate compliance with employment tax laws.

Save Receipts That Support Tax Deductions

Receipts often serve as the evidence behind deductions claimed on your tax return. If you're deducting business expenses, charitable donations, medical expenses or other qualifying costs, you'll want documentation that supports those claims.

Examples include:

• Office supply purchases
• Business travel expenses
• Equipment purchases
• Vehicle expenses
• Charitable contribution receipts
• Home office expenses

Once the applicable record retention period has passed, often three years from the date the return was filed, many routine receipts can usually be discarded. However, receipts tied to long-term assets should be kept much longer.

Keep Fixed Asset Records Until After the Asset Is Sold

Fixed assets include property or equipment expected to provide value over multiple years, such as:

• Commercial equipment
• Machinery
• Company vehicles
• Computers
• Furniture
• Buildings

The purchase documentation for these assets establishes their original cost basis, which affects depreciation calculations and any taxable gain or loss when they're eventually sold.

Because of this, records for fixed assets should generally be retained for as long as you own the asset, plus several years after its sale.

Don't Throw Away Property Purchase Documents

Property ownership records deserve special attention because they establish your cost basis in real estate. Important documents include:

• Closing statements
• Purchase contracts
• Settlement documents
• Records of major improvements
• Title information

These records help calculate capital gains when you eventually sell the property. Improvements such as room additions, roof replacements, HVAC installations or extensive remodeling can increase your property's basis, potentially reducing taxable gains.

For this reason, property purchase documents should generally be kept for as long as you own the property and for several years after the sale.

Digital vs. Paper Storage

Many financial documents can be scanned and stored electronically, provided the images are complete, legible and securely backed up. Multiple backup locations, password protection and encrypted storage can help protect sensitive financial information.

That said, certain original legal documents may still be worth keeping in paper form, particularly those involving business formation, property ownership or signed legal agreements.

Which Records Should Be Kept Permanently?

While many financial records can eventually be discarded, some should remain part of your permanent files. Examples include:

• Business formation documents
• Property purchase and ownership records
• Retirement account contribution records
• Estate planning documents
• Insurance policies currently in force
• Final versions of important legal agreements
• Prior tax returns (many professionals recommend keeping copies indefinitely, even if supporting documents are eventually discarded)

Get Help From Phoenix Tax Preparers Who Understand Recordkeeping Requirements

If you're unsure which records you should retain or need help developing an organized recordkeeping system, the professionals at H&H Accounting Services can help. Call us at (480) 561-5805 to schedule a consultation.