Record Retention: What to Do with Your Tax Records
The IRS requires you to keep your tax records and supporting documents for a period of three years, but there’s a catch: they can request documents going back six years if they decide to conduct an audit.
What is the right amount of time to keep your tax records?
For most businesses, Simon Lever recommends keeping tax records and associated documents for a minimum of seven years. However, you’d be wise to keep certain documents—such as tax payment receipts, cancelled checks and financial statements—for as long as you can.
In Pennsylvania, the Commonwealth requires you to keep tax records for a minimum of three years, but this can be misleading—especially if those records relate to the original valuation of your business or real estate property and establish the foundation for depreciation deductions over time.
Are there exceptions to the rules?
Typically, a taxing authority like the IRS or the Commonwealth of Pennsylvania has three years from the date of a return to conduct an audit. However, that deadline can be extended if you file an amended return, or the taxing authority has reason to believe you understated your income by more than 25 percent.
Another reason to keep your returns beyond the stated limit is to ensure you’re keeping all records that might support deductions taken in future tax years. Like the depreciation example above, some records establish a basis for when an initial deduction was taken. Since certain deductions and tax credits can be carried forward or backward for a period of time, holding on to the records establishing the initial period is a good idea.
What records should you keep?
First, the law does not stipulate the format for your records, so if you regularly scan documents or maintain a cache of documents on a hard drive or in a cloud, that is perfectly acceptable. As to which documents to keep, generally speaking, you should keep any documents that help to establish your income, identify your deductions or credits, and support your reasons for a refund. These likely will include canceled checks, paycheck stubs, and receipts.
Although you may believe your bank or credit card statements can serve as a substitute for point-of-sale receipts, you would be mistaken. Statements are excellent for detailing how much money has been spent in a given category, but if the Commonwealth of Pennsylvania or the IRS are conducting an audit, only the cash receipt will identify what specifically was purchased. This becomes much more important when that item is used to establish the basis for a deduction. In some cases, without the cash receipt, you could be looking at a loss of the deduction and a new liability. Even though many businesses keep electronic records of sales going back years, it’s best not to count on someone else’s record-keeping to protect you during an audit.
If you have questions about how long to hold on to specific records or tax-related documents, call the return specialists at Simon Lever LLP. Let’s start a conversation.