I just returned from the Marshalls Fall Show at Lake Geneva, Wisconsin. During the show I gave two different seminars, one For Booth Renters Only and the second program was on Taxes for Salons and Spas. I was probably asked the following question at least 10 times during the weekend.
"How long do I need to keep my records?"
I thought that you might be interested in my answer.
RECORD RETENTION
First, for your convenience, we have prepared a free handout that shows in detail how long you have to keep specific items. You will find this handout by visiting our website at http://www.kopsaotte.com/salon/?q=node/12. The following is an overview of the rules.
When determining how long to keep most of your income tax records, we look at the time frame over which the IRS can audit a return and assess a tax deficiency, or the time frame that you can file an amended return. For most taxpayers, this period is three years from the original due date of the return or the date the return is filed, if later. For example, if you file your 2005 Form 1040 on or before April 15, 2006, the IRS has until April 15, 2009 to audit the return and assess a deficiency. However, if a return includes a substantial understatement of income, which is defined as omitting income exceeding 25 percent of the amount reported on the return, the statute of limitations is extended to six years.
A good rule of thumb for keeping tax records is to add a year to the IRS statute of limitations period. Using this approach, you should keep your income tax records for a minimum of four years, but it may be more prudent to retain them for seven years, which is what the IRS informally recommends. State tax rules must also be considered, but holding records long enough for IRS purposes will normally suffice for federal and state tax purposes, assuming the federal and state returns were filed at the same time.
Certain tax records, however, should be kept much longer than described above and some should be kept indefinitely. Records substantiating the cost basis of property that could eventually be sold, such as investment property and business fixed assets, should be retained based on the record retention period for the year in which the property is sold. Tax returns, IRS and state audit reports, and business ledgers and financial statements are examples of the types of records you should normally retain indefinitely.
Keep in mind that there may be non-tax reasons to keep certain tax records beyond the time needed for tax purposes. This might include documents such as insurance policies, leases, real estate closing statements, employment records, and other legal documents.
It is also important to know that the IRS permits taxpayers to store certain tax documents electronically. Although the rules are aimed primarily at businesses and sole proprietors, they presumably apply to other individuals as well. The rules permit taxpayers to convert paper documents to electronic images and maintain only the electronic files. The paper documents can then be destroyed. Certain requirements must be met to take advantage of an electronic storage system, so contact us if you want more details.
The timetables listed above are the requirements for tax purposes. You should contact your attorney for additional guidance on record retention for legal purposes.
Larry Kopsa CPA
