If your organization has too many filing cabinets bursting with accounting records and tax support documents, you may have had the urge to yank them all out and make a bonfire in the workroom. But aside from violating a dozen safety standards by starting a fire in the office, purging all your documents at once isn’t necessarily the right way to go about it. The IRS and other outside agencies can request support for your tax returns for several years after you file, so it’s best practice to keep them on hand.
Why to Hold on to Records if Someone Else Prepares the Tax Return
Just because you don’t prepare your own federal, state, and local tax returns doesn’t mean you’re not ultimately responsible for them. If something’s wrong with the way your tax services provider files your return, the IRS will notify you, and you’ll be responsible for solving the problem.
In addition, the IRS has the power to freeze bank accounts and seize funds until they have exactly what they need from your organization.
How Long Should I Keep Financial Documents?
There’s a balance between freeing up storage space and maintaining full records in case of an IRS review. Some documents you only need to keep for a few years, whereas others are critical and should be kept permanently. Though some special circumstances may change these general guidelines, here is a starting list of which types of documents you may need to keep:
- Audit reports from CPA firms
- Cash books
- Charts of accounts
- Checks for important payments, such as taxes, purchase of property, etc.
- Important correspondence, such as legal matters
- Deeds, mortgages, and bills of sale
- Financial statements
- Insurance records, claims, and policies
- Property appraisals by outside appraisers
- Tax returns and worksheets
- Any trademark registrations
Keep for 7 years
- Accounts payable/receivable ledgers and schedules
- Settled accident reports and claims
- Expense analysis and expense distribution schedules
- Inventories of products, materials, or supplies
- Invoices from customers or vendors
- Vouchers for payments to vendors, employees, etc.
Keep for 3 years
- Employee personnel records (after termination)
- Employee applications
- Expired insurance policies
- Internal audit reports
- Savings bond registration record of employees
Keep for 1 year
- Bank reconciliations
- Routine correspondence with clients/vendors
- Purchase orders
- Duplicate deposit slips
For those property owners who have purchased low-income housing tax credit (LIHTC) properties, there are a few additional document retention requirements to consider. As most LIHTC properties are under a 15-year time frame, you should keep your tax documents, including additional year one information, so you know what to take out at year 15. These include:
- IRS Form 8609s
- Tax credit lapse schedules
- First year tax return (and any additional returns up to the first full year of credit)
How Should I Store Documents?
As you can probably guess, tax and supporting documents contain sensitive information, like your Employee Identification Number, income amounts and sources, and bank account numbers. If you have these records on paper, keep them locked up.
And for digital records, keep them encrypted or password-protected if possible, and backed up to at least one other location. There are many online services that offer encrypted data storage and automatic backups, some for free. And if that isn’t enough, you can also keep that information on a flash drive or internal server that you can get access to at any time.
When in Doubt, Keep it
As always, consult your CPA or financial advisor before deleting or destroying financial records. Although your filing system may be bursting at the seams, in this case, it’s better to be safe than sorry. If you own a LIHTC, HUD, or Rural Development (RD) property, you can also contact us for an expert auditor’s advice on document retention for your specific situation.