A rule of thumb is that the longer a bill goes uncollected, the less likely it is ever to be paid. The same might be said about the contents of file cabinets – the longer they stay there the less likelihood there is of their ever being needed.
Unfortunately, however, there are two reasons why you can’t just chuck everything after a year or two, thereby clearing out valuable storage space:
1) Although only one document out of a hundred may ever be needed, that indispensable single piece of paper is hard to identify in advance.
2) Various laws, together perhaps with the requirements peculiar to a particular industry, may demand that some papers be saved for specified periods – or indefinitely.
Many of the records retained are needed in order to file accurate tax returns and to document the claims made in those returns, should they be audited. The IRS doesn’t tell us which books or records to maintain; it simply requires that there must be support for representation made.
How Long to Keep Them?
How long must tax-related papers be kept? For most tax data, the statute of limitations runs out three years after a return is due or filed: There are reasons why some documents must be kept longer, however. If you wish to establish basis of a piece of property acquired and improved over many years, you’ll need documentation going way back, too; and, of course, if there is omission from gross income of 25 percent or more, the statute of limitations is six years, while in cases of fraud there is no time limitation at all.
Branches of government other than the IRS also require companies to maintain all sorts of books and records, covering everything from elevator inspection to the purity of food products, the health and safety of employees and the justification for government grants, loans or subsidies. Federal rules are summarized in a book, Guide to Record Retention Requirements in the Code of Federal Regulations. Although this volume, while extensive, is not all-inclusive, it might be worth consulting at your public library if the industry you are in is subject to federal agency regulation – and which industry isn’t? Simply having employees, for example, puts you under the purview of the Labor Department.
Various lists of recommended document retentions generally agree on documents that should be kept permanently – income tax returns, for example, and property records. The accompanying chart was based on a consensus of several such lists. Before adopting it as your own, however, you would want to make provision for types of documentation unique to your own business and then, no doubt, review the result with us.
Typical Record-Retention Schedule*
Audit reports and financial statements
Canceled checks for taxes, capital purchases, important contacts
Capital stock and bond records
Contracts and leases in force
Copyrights, patents, trademark registrations
Corporation charter, minute books and bylaws
Correspondence on legal and tax matters
Deeds, mortgages, easements and other property records
General ledgers and journals
Tax returns and work papers, including records to support carrybacks and carryovers
Retain 7-8 years
Other canceled checks
Vouchers for payments to venders, employees, etc.
Payroll records, including time sheets
Payables and receivables ledgers
Expired contracts and leases
Invoices and other sales records
Plant cost ledgers
Retain 6 years
Monthly trial balances
Employee withholdings tax statements
Employee disability benefits records
Retain 3 years
Personnel files on terminated employees
Petty Cash Vouchers
Expired insurance policies with no residual values
Retain 2 years
* The above list is only a rough guide, requiring adjustment to specific needs and statutory requirements. Legal counsel is advisable before putting a record-retention schedule into effect.