Spring cleaning your office can be your yearly declutter that leads to higher productivity and just a nice feel-good factor. However, before you go ahead and throw out last year’s tax prep files, it’s important to know how long does a business need to keep records? While it might seem like a simple question, this seemingly harmless task of removing junk can have significant repercussions for your businesses’ future.
Some instances where maintaining tax records is important include periodic IRS audits, credit refund claims, receipts or return forms. It is also important when claiming deductions for losses or bad debts. Having an organized and accurate tax record helps businesses avoid costly penalties and simplifies the claims process. Along with that, it also makes audits process, whether external or internal, much smoother.
For businesses in the process of maintaining their tax records, there is a need to understand that different tax documents have different expiry dates. These dates are also flexible, as in some cases, the IRS might require the records to be kept indefinitely.
This blog explains how long should a business keep tax records, how to maintain those records within that duration. Along with that, what steps businesses can take in case of missing documents.
How long do you need to keep business tax records?
Under Publication 538 and Topic 305, the IRS outlines specific retention periods for various categories of records. These periods are determined by when the limitations period expires. The expiration period can range from 3 to 7 years. Here’s is the breakdown ofeach of those different categories of business tax records:
IRS Business Record Retention Periods
| Situation/Record Type | Retention Period | Detailed Reasons & Included Documents |
|---|---|---|
| General Rule (Most Records) | 3 years from filing/due date (later). | Standard audit period. Includes: W-2s, 1099s, invoices, receipts, cancelled checks, credit card statements, mileage logs. |
| Claim for Credit/Refund | 3 years from filing or 2 years from payment (later). | Overpayment claims. If you did not file, it is 2 years from tax payment. |
| Substantial Income Omission | 6 years from filing date. | 25%+ underreporting. Applies if you exclude >25% of gross income or >$5,000 in foreign financial assets. |
| Bad Debt/Worthless Securities | 7 years from filing date. | Loss claims. Allows for filing a claim for credit/refund based on these specific deductions. |
| Employment Taxes | 4 years after tax is due/paid (later). | Payroll & withholding. Includes EIN, wages, tips, FICA, W-4s, I-9s, payroll tax returns. |
| Fraudulent Return | Indefinitely. | No statute of limitations. IRS can pursue at any time. |
| No Return Filed | Indefinitely. | No statute of limitations. Essential to prove no return was required. |
| Asset/Property Records (Real Estate/Stocks) | While owning + 3 years after disposal. | Basis tracking. Keep purchase records, closing statements, improvements (renovations), and depreciation schedules. |
| Permanent Records (Business) | Indefinitely. | Foundational docs. Articles of incorporation, bylaws, minutes, general ledgers, deeds, and audit reports. |
| Retirement Plan Records (IRA/401k) | 3-7 years after full withdrawal. | Contribution tracking. Keep records until the account is closed and final withdrawal is reported + 3-7 years. |
How to keep business tax records according to IRS tax record retention guidelines?
To keep business tax records for the recommended period, there are two methods businesses can use.
Digital:
The IRS accepts digital copies of tax records, provided they meet certain thresholds and are eligible. In this method, create an organized digital filing system and using safe, encrypted data storage systems such as Google Drive or Dropbox orcloud-based accounting software. With these digital records, businesses can maintain remote access and backups across all their devices.
One concern for businesses is the matter of data security. Ensuring that their cloud service provider meets secure data security standards.
Physical:
The IRS accepts paper records of your business tax documents. Your business tax records should be organized, and the way you maintain your records should enable you to easily access your tax records when you need to. For your tax records, creating a uniformed labelling system using totes, filing cabinets or labelled folders that are organised according to the year and the type of document being saved.
Keep income documents and expense documents in separate sections of your records. Make sure to create an additional copy of thermal receipts that are fading so that you have a readable document throughout your entire retention of that receipt. Keep all of your records in a dry, safe and fireproof environment, particularly when storing long-term records of assets. This keeps all of your records safe regardless of how long does a business need to keep records.
What to do if business tax documents are missing?
Carefully maintaining all relevant business tax/records can still lead to instances of missing or incomplete information. This may not necessarily result in penalties; however, losing vital tax materials can complicate future audits, refunds, and tax corrections. Therefore, businesses should keep appropriate documentation and take action without delay; otherwise, they risk noncompliance with IRS rules and regulations.
Reconstruct Records Using Secondary Evidence
If an original document is not available, the IRS allows reliable secondary sources to reconstruct your records. Examples of these secondary sources include bank statements, credit card statements, invoices from suppliers, confirmation of payments made, and payroll summaries. The IRS allows you to reasonably support the income, expenses, and deductions listed on your tax return.
Request Copies From Third Parties
Businesses can often recover missing documents by contacting third parties. Banks, credit card companies, vendors, contractors, and payroll service providers may be able to issue duplicate statements or transaction records covering prior years.
Obtain IRS Transcripts
The IRS allows taxpayers to access three types of transcripts: tax return transcript, wage and income transcript, and account transcript. Although these transcripts do not include the entire copy of the tax return, they can assist businesses. One of those could be verifying their reported figures and identifying any discrepancies or omissions found in their business records.
Maintain Documentation Explaining the Loss
When records have been lost as a result of theft, natural disasters, technical failures, or any other unforeseen events, businesses are advised to prepare written explanation documentation regarding the events. This documentation can be used for tax audits and when requesting relief from penalties.
Seek Assistance from a Tax Professional
In many cases, contacting a qualified tax professional can help resolve gaps in required tax records. Without proper guidance, these situations can quickly become more complex.
For example, claiming substantial deductions, calculating the basis of your assets, or reconciling discrepancies over several years. A tax professional can assist you in determining the type of alternative records to use and ensure that you are compliant with IRS requirements.
Conclusion
Tax documents have different retention timelines based on IRS regulations and other records. Therefore, it is critical that businesses create an orderly and easily accessible recordkeeping system that meets their tax obligations. The development of a document retention plan that allows companies to efficiently access their tax records when there is an audit, amendment or review of their financial statements, depends on how long should a business keep tax records. This protects the company from penalties for failing to provide tax documentation for the required time frames.
A regular practice of record retention and proper documentation helps prevent recordkeeping errors, incomplete records, and additional administrative costs. Documentation retention for the appropriate period and the destruction of that documentation only when it is permissible under IRS rules.
