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KSM Blog | Katz, Sapper & Miller CPA

Purge or Keep: How to Determine Record Retention Periods

Posted 2:56 PM by

The Internal Revenue Service (IRS) requires taxpayers to maintain documents and records that support tax positions and returns filed. The inability to produce documents under an examination can have harsh consequences on the outcome of a tax audit. Therefore, deciding how long to continue storing or destroying tax and company records can make file purging a risky task.

Generally, the tax regulations require records be maintained as long as they are necessary to administer the tax law. The federal statute of limitation is normally three years, but if income is substantially under reported, or the return is fraudulent, or no return has been filed, the statute of limitations could be six years or longer. The statute of limitations in various states could exceed the federal regulations.

Records subject to the retention guidelines apply to both paper and computer records. In an age where endless amounts of data, documents and records can be retained electronically, it is essential to equally enforce legal and company retention policies across both the storage room and the computer server. Not maintaining documents for the required time period or retaining certain information for an endless time period can create unintended consequences and liabilities.

The following retention periods are suggested for common business and personal documents.

Permanent Records – Both individuals and businesses have “permanent” type documents and information that should be kept indefinitely.

  • Annual audited financial statements
  • Canceled checks (tax payments, fixed asset purchases, other major items)
  • Chart of accounts
  • Company minutes
  • Corporate stock records
  • IRS audit reports
  • IRS elections
  • Legal documents
  • LIFO inventory records
  • Property appraisals
  • Real estate purchase and sell records
  • Retirement and pension records
  • Tax returns
  • Trademark registrations
  • Trust documents
  • Vital records (birth, death, marriage, divorce, adoption, etc.)

Six/Seven-Year Records – The IRS may go back six years when auditing tax returns, depending on the examination issue. Therefore, records should be carefully stored for this period. Keep in mind the statute of limitation period starts at the later of the date the return is filed or the original due date. For example, if the 2014 return was extended for six months but filed on April 20, 2015, the six-year statute of limitation would not expire until April 20, 2021.

  • Bank loans (after payoff)
  • Bank statements
  • Contracts (after expiration)
  • Employee payroll records
  • Insurance records
  • Leases (after expiration)
  • Mortgage and notes receivable (after payoff)
  • Accounts payable ledgers
  • Accounts receivable ledgers
  • Employee time records
  • Inventory records (non-LIFO)
  • Note receivable ledgers
  • Payroll tax records and reports
  • Subsidiary ledgers
  • General ledgers and journals
  • Workpapers for tax returns
  • Depreciation schedules (three years after life of asset)
  • Property records, builder contracts, improvement receipts (on property sold)

Three-Year Documents – These records are more detailed in nature supporting tax returns and other business matters, but with the passage of three years, they are usually no longer needed.

  • Auto mileage books
  • Bank deposit slips
  • Bank reconciliations
  • Budgets
  • Cancelled checks
  • Charitable acknowledgements
  • Credit card statements
  • Entertainment records
  • Expense reports
  • Expired insurance policies
  • Interim financial statements
  • Medical bills
  • Petty cash vouchers
  • Sales invoices
  • Vendor invoices
  • Employee personnel records (three years after termination)

Unclassifiable – Unfortunately, one size does not fit all, and certain documents and unusual circumstances may dictate longer or judgmental retention periods. In addition, it may be necessary to consult an attorney or accountant in special cases.

  • Car records (keep until car sold)
  • Credit card receipts (keep until reconciled on statement)
  • ATM and deposit slips (keep until reconciled on statement)
  • Insurance policies (keep for life of policy)
  • Pay stubs (keep until reconciled with W-2)
  • Sales receipts (keep for life of warranty or life of item on large purchases)
  • Warranties and instructions (keep for life of product)
  • Other bills (keep until payment verified on next statement)

Organization, regimented procedures and proper policies on record retention and destruction can reduce the liability risk associated with record management and ease the annual task of purging the next year’s aged files.

About the Author
Mark Flinchum is the partner-in-charge of Katz, Sapper & Miller’s ESOP Services Group. Mark counsels clients on the unique opportunities and potential tax benefits of creating an ESOP, and provides guidance throughout the many stages of an ESOP transaction. Connect with him on LinkedIn.

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