Federal Tax Records – General Rules
If you filed a complete, accurate return, you should keep your tax records for at least three years, the period of time the Internal Revenue Service has to initiate an audit. Tax records include a copy of your tax return, all federal forms received to complete the return such as Form W2 and Form 1099, statements, and receipts to support itemized deductions and business income and expense.
The general rule does not apply if you fail to report income that equates to 25 percent or more of the gross income reported on the return. In that case, The IRS can review six years of returns. If you commit tax fraud or you are required to file a tax return and do not, the IRS may review tax information for that tax filing year indefinitely.
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Federal Tax Records – Business Rules
If you own a business, the rules for how long to keep tax records may vary due to fixed assets. Fixed assets are assets of the business, such as equipment or an office building, that have a useful life of more than one year. According to IRS regulations, businesses must expense a portion of the cost of a fixed asset over the number of years that the IRS designates for the asset’s useful life. This expense process is called “depreciation.” Depending on the useful life, assets may be depreciated over a few years up to a few decades. The original receipts and/or legal documents for fixed assets should be kept as long as you are still taking a depreciation deduction for the asset on your tax return.
Most businesses do not receive federal tax filing forms such as Form W2 or Form 1099. Instead, business owners must maintain paperwork generated by business transactions to support the business activity reported on the federal tax return. Income can be supported by paperwork such as cash register receipts, bank deposits, invoices and credit card charge slips. Business expenses can be supported by paperwork such as receipts, bank account statements, credit card statements and slips, journals for small cash-only expenses, such as occasional tolls or parking and even postage.
Payroll Record Retention
The IRS also sets forth rules concerning how long to keep tax records that have to do with payroll expense. If your business has employees that you pay using a traditional payroll model, then the business also remits Social Security tax, Medicare/Medicaid tax, employee federal tax withholding and federal unemployment tax to the IRS during the tax filing year. The IRS requires businesses to maintain the following payroll records for four years:
- Employer identification number and paperwork.
- Employee information, including name, address, social security number, job title and date of employment.
- Dates and amounts of all sick time paid, reported and allocated tips, fair market value of in-kind wages, wage, annuity and pension payments, and any fringe benefits or expense reimbursements.
- Copies of all payroll tax federal forms such as Form W-2, Form W-4 and Form W-5, and 1099s issued.
- All employee-issued copies of Forms W-2 and W-2c that were returned as undeliverable.
- Dates, amounts, and reference numbers for all payroll tax remittances made using the electronic federal tax payment system (EFTPS), as well as a copy of the all the payroll returns filed.
If you follow these general guidelines on how long to keep tax records, if you do run into an audit situation, you should have everything at hand the IRS will need.
Resource: Internal Revenue Service (https://www.irs.gov)