Spring Cleaning: Recordkeeping Guidelines to Save or Shred

Apr 20, 2020Business, Business Tax

Are you a recordkeeping pack rat? Many individuals and businesses hold onto paper and digital records indefinitely — just in case. But securely storing years of financial records can become burdensome. Here is some guidance to help minimize recordkeeping overload.

Tax Returns

  • Most tax advisors will recommend you hold onto copies of your completed tax returns indefinitely. Why? That way, you can prove to the IRS you filed. Even if you do not keep the returns forever, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup Records

  • It is a good idea to keep records supporting items shown on your tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. Examples of supporting documents include: 
    • Canceled checks and receipts for alimony payments
    • Charitable contributions
    • Mortgage interest payments
    • Retirement plan contributions. 

NOTE: You are not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there is suspicion of fraud or you do not file a tax return at all, there is no time limit for the IRS to launch an inquiry.

  • Also, records supporting figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards, or casualty losses, need to be saved until the deductions no longer in effect, plus seven years, according to IRS instructions.

Employee Records

  • Keep personnel records for three years after an employee has been terminated. Also, maintain records supporting employee earnings for at least four years. This timeframe should cover various state and federal requirements. However, do not throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee. Timecards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it is a best practice for all companies to keep the files for several years in case questions arise.

Employment Tax Records

  • Keep four years from the date the tax was due or the date it was paid, whichever is longer.

Travel & Entertainment Records

  • For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.

Property

  • Records used to substantiate the cost and deductions (such as depreciation, amortization, and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.

IMPORTANT NOTE: These guidelines are all geared toward complying with federal tax obligations.

Secure Disposal of Sensitive Data

Think twice about keeping certain financial records indefinitely. The more records you store, the higher the likelihood your data will be stolen or hacked. Destroying sensitive documents can reduce the chances you or your company’s employees and customers will become identity theft victims.

Regardless of whether you are tossing out personal or business financial documents, always shred them thoroughly first. Also, use proper disposal protocol for any computers and other electronic equipment (such as printers and copiers) that may contain financial data. Simply deleting files using File Manager — or a sledgehammer — is not enough. Proper disposal requires a device’s hard drive to be rewritten multiple times.

If you fail to use proper disposal techniques, tech-savvy hackers may be able to re-create sensitive data from the device’s hard drive when it is thrown out, donated to a charity, or returned to the lessor after the lease term has expired. Outside vendors can help manage your asset disposal needs, but they also can pose additional risks. Your Smith Schafer professional can help you choose a reliable vendor that conducts background checks on employees, offers risk indemnification, tracks assets during the disposal process, and ensures assets are disposed of in an environmentally responsible manner.

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