How Long to Keep Documents and Tax Records

Keeping your documents in good order is an absolute necessity in our day and age. The average person usually has a box full of essential documents before hitting 30. And if during that time, they establish a private business, that would easily increase to ten boxes.

But do you need to keep every little piece of paper? There are some rules of thumb, in addition to governmental regulations. The IRS has its own requirements regarding the minimum retention period for the various types of documents. After that, you’re free to dispose of them.

In this article, we’ll get into deep details on how long to keep documents and tax records. In addition, we’ll tell you the best ways to organize your documents, how to keep them safe, and the best ways to dispose of the expired records.

How Long to Keep Documents and Tax records?

The IRS requirements are often the most quoted in that regard. However, there are other parties that might need to review your tax records, financial, or legal documents. And these may not have the same time limits given by the IRS.

That’s why the IRS recommends keeping the documents for longer than its own suggested schedule. These other parties include insurance companies, banks, corporate partners, or creditors.

The following are the recommended time limits suggested by the IRS, as well as, what we know from practical experience.

Documents that Need to Be Kept Indefinitely

  1. Copies of previously filed tax returns, a hard copy is necessary.
  2. Records relating to property or property transactions.
  3. Records of inheritance.
  4. Records of major legal or financial events.
  5. Records should be kept indefinitely if a person fails to file a return or commits fraudulence in filing returns.

Documents Requiring up to 7 Years of Storage

  1. Employment tax records should be kept for 4 years. The time is calculated from the due date or the payment date, whichever is later. A hard copy is preferred.
  2. Records of mistakes in tax returns filing amounting to 25% of the gross income should be kept for six years.
  3. Yearly bank statements, investment dividends, royalties, and brokerage statements,
  4. Tuition fees, travel expenses, personal spendings, and charity donations.

Documents Requiring up to 3 Years of Storage

  1. The IRS recommends keeping documents for three years, as long as:
  • There’s no unreported income exceeding 25% from the gross income
  • You never failed to file a return
  • No fraudulent returns are filed

In case any of the above exceptions exist, then you should keep your financial documents for 6 years in case of unreported income, and indefinitely for the next cases.

  1. In case you filed a refund claim, the IRS recommends keeping records 3 years after filing a return, or 2 years after paying the tax, whichever is the later date.

Documents Requiring 1-Year Storage

  1. Monthly bank statements and credit card activity
  2. Shopping receipts and minor personal expenses
  3. Fines and similar service fees
  4. Utility expenses

When Does the Clock Start?

It’s important to know where the starting and ending dates are marked exactly. Actually, the IRS made this point quite clear. The two years, three years, or any other time limit doesn’t start from the time that you submit the returns. It starts counting from the indicated deadline date.

Therefore, if you filed your documents a month ahead of the deadline, you should still commit to the due date given by the IRS.

This difference in calendar markings might be problematic if you automatically delete documents once they become unnecessary. In case you consider the filing date as your reference instead of the due date, you could delete documents that might still be needed for an audit.

This is another good reason why you should extend the document retention period beyond the nominal limit. A mere six months to a year could save you a lot of avoidable hassles. And if keeping paper records is too complicated, you can use digital storage for all the important documents.

Is It Business or Personal?

Businesses generate a huge amount of documents. And the above recommendations apply just as much to your professional papers as they do to your personal affairs. Thus, if you run a business, work freelance, or have any other financial activity, then you should also set up a filing system for these documents.

Here are some of the business documents that you should store, whether in paper or digital form:

  1. Business tax returns top the list, naturally, and they should be kept for a minimum of three years.
  2. Financial documents come right next to tax returns. Mainly as they’re used in preparing tax return documents. But also, since they are routinely reviewed to assess the business’s performance.
  3. Employment records should be kept for all current employees. As for the ones who retired, resigned, had work-related accidents, or were terminated, their files should be kept for 7-10 years.
  4. Documents related to payroll taxes, which include basic salaries, wages, benefits, and tips. In addition to tax deposits and pensions. These records should be retained for at least 4 years from the tax due date or the tax payment date, whichever is later.
  5. Job applications should be retained for at least 3 years, regardless of whether the applicant was hired or not.
  6. Accounting books and ledgers should be kept indefinitely.
  7. Bank statements, cheques, credit card statements, and similar records of financial activities should be kept for at least 7 years.
  8. Property and ownership documents should be kept permanently.
  9. Business permits, establishment papers, certificates, and licenses should be kept permanently.
  10. Records of company policies, bylaws, annual meeting minutes, and stakeholder correspondence should be kept permanently.

Generally, keeping these documents in storage for a minimum of 7 years is the norm, unless otherwise stated. This is often the time window where claims, audits, and legal matters could require these papers. However, if you can keep a digital record of your documents, that would be wise.

It’s worth mentioning that the above points are given as a guide rather than an exclusive list. A solicitor and registered accountant should still be consulted and have the final say on the matter.

Organizing Your Documents

We all need to keep some of our documents in paper form, as they can only be legally binding in that format. We also pile up increasing amounts of digital records, from bank e-statements to copies of paper documents that are no longer needed in their physical form.

Both paper and digital documents could easily turn into a mess if left without organization. The problem doubles if you’re also handling one or more businesses at the same time.

A typical situation most of us experience is looking for a receipt or certificate in 10 drawers, 5 lockers, and 20 different boxes. Maybe even a handbag or two. No one enjoys that kind of stressful situation. Especially, since we only do that treasure hunt when we urgently need a document.

The best approach is to create a filing system that’s well suited to your individual requirements. It should be easy to add to, modify, and delete from. And finally, it should be easy to make it larger when your generated documents call for such an expansion.

In a nutshell, your document organization system should be:

  • Efficient
  • Accessible
  • Expandable

Here are some considerations for creating an optimal system, and some examples for inspiration.

Filing Paper Documents

First of all, we need to admit that filing our papers properly is an overwhelming task. And that’s pretty much why most of us have mile-high piles of papers on our desks. Getting ourselves to clean up the ancient documents is tough, but it needs to be done.

Do you know how to eat an elephant? Exactly! You divide it into tiny little chunks.

Assess Your Document Storage Needs

There are two basic questions you need to ask: How many essential documents do you already have? And how many documents do you generate per month? This should tell you whether you need a filing room or a filing cabinet.

Choose a Suitable Storage Location

Choose one storage place and don’t put a single paper anywhere else. You can leave a tray or box near your storage cabinet for unfiled papers. But try not to let it overflow.

Classify, Arrange, and Label

Some people make broad categories, like House, Car, and Kids. While others might subdivide everything into multiple entries. Try to go with a middle ground between these two extremes.

Always label your files, and insert your documents in chronological order as much as possible.

Digital Document Storage

Organizing digital files might seem to be easier than physical ones, but that’s not exactly true. Duplicates, vague folder labels, misplaced files, and incompatible formats are all annoying incidents that we all know too well.

Interestingly, while planning your digital storage, you’d find that the steps are similar to physical storage. Start by assessing your storage needs, then assign a specific device (or several of them) for keeping your documents.

Classifying and labeling your files is of huge importance. When you start with a clear plan, usually, all the documents can be sorted into their proper places easily. If that doesn’t happen, then you’d need to revise your storage system.

You could also use some of the commercially available software apps. This way, you could also link all your devices together, and access your information from any place in the world.

Document Safety

If you’re going to store your documents for years, then you have to make sure that the data stays intact. Here are a few points to consider.

Keeping Your Paper Documents Safe

Limit the accessibility of your documents to yourself and other authorized people only. This applies to your household and your business. Even if you think that these documents aren’t too sensitive, it’s better to err on the side of caution.

Lock and key are basics. And you could also set up a simple camera surveillance system. It’s not costly, and it could save you a lot of costs along the line.

Document safety also includes protecting your papers in case of fire, mold, humidity, or plumbing problems. You might not need to apply these stringent measures to all your documents, but at least keep the important ones in good storage.

Keeping Your Digital Documents Safe

This includes the above considerations of physical safety and protection from theft, in addition to protection from hacking and digital malfunctioning.

Using malware protection is critical to keep your data from digital prowlers. And if your documents are of a sensitive nature, extra measures are needed. You might want to consider dedicating a laptop or PC that’s not connected to the internet for document storage.

Keeping the documents in PDF format is preferred, and of course, you’d need to make several backups. Saving to the cloud isn’t a leak-tight option, but you can use it with some discretion.

Proper Disposal of Expired Documents

The physical or digital documents that you no longer need should be disposed of in a safe manner. You wouldn’t want private or sensitive information to fall in the wrong hands, and you definitely don’t want to be vulnerable to identity theft.

Shredding papers is often preferred to simply throwing them into a wastepaper basket. As for the digital files, deleting data can always be reversed. It’s best then to format the hard drive, flash drive, or memory card.

There are some professional services for the safe disposal of documents, so you can contact them if you like.

In Conclusion

From the day we are born we receive a certificate marking that big event. And from that moment on, we keep on accumulating meaningful and important documents.

By the time we become adults, we learn to make and spend money. And naturally, we are required to participate in the larger economy of our country, which translates to paying taxes. This matter is document-intensive, and it generally demands presenting a summary of all our financial activities.

While holding on to every piece of paper might seem like a wise decision, the accumulation of that many documents is barely practical. That’s why it’s important to know how long to keep documents and tax records.

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