Only around 1 out of every 220 taxpayers were audited by the IRS last year, CNBC reports. Nevertheless, it’s important for businesses to implement strategic record-keeping systems to ensure they have the information needed for annual tax filings and potential audits. By knowing how long you need to keep particular records, you can better keep your business organized, running smoothly, and avoid running into unnecessary problems.
It’s essential to keep a record of your business tax returns (along with all associated documentation) until you can no longer be audited for that tax year. The IRS recommends businesses keep a hold of their tax returns for at least three to six years from the time of tax filing. While it may be tempting to destroy your records after three years, keeping them for at least six years may end up paying off. The IRS can request up to six years worth of financial records and for up to seven years if you claimed a deduction on a bad debt. If you don’t have adequate storage space in your office the best thing to do would be to use a secured offsite document storage facility.
Accountants usually recommend businesses keep financial records like bank statements and credit card statements for seven years. That said, if your monthly financial statements aren’t required for tax purposes, you may want to destroy them after one year. Keeping detailed copies of annual statements for seven years will instead be sufficient. Brokers and dealers also have to be particularly careful with their financial record keeping. Overseen by the SEC and FINRA, 17a-3 and 17a-4 are two key regulations concerning record requirements. 17a-3 requires brokers/dealers to keep records easily accessible and absolute (for at least six years), while 17a-4 details how exactly records should be retained.
If you have employees, it’s important to keep records of all associated human resources files (for both former and existing employees). Such files should include job applications, resumes, and performance reviews. You should keep these files for at least seven years after an employee leaves (along with a record of their reasons for leaving). Additionally, employment tax records (including time sheets and benefit payments) should be kept for at least four years, according to the IRS.
Record keeping isn’t a fun task, but it’s essential for keeping your business organized. By knowing how long to keep your tax returns, financial records, and employee records, you can help ensure your business runs smoothly and avoid running into problems later down the line.