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General rule for keeping tax records

Tax records include your filed business tax returns, receipts, invoices, financial statements, and payroll documents. These documents substantiate your gross income, tax deductions, or credits. These records are essential not just for compliance but also for protecting your small business. They serve as proof in case of an IRS inquiry or legal dispute and help you claim deductions accurately.

Standard 3-year record retention rule

The Internal Revenue Service advises you to keep your tax records for at least three years from the date you file your return. This three-year period matches the statute of limitations. During this time, the IRS can audit your return or adjust your reported income. If you file early, the clock starts from the official tax deadline, not your filing date.

They have implemented the 3-year rule as it gives the IRS enough time to review your filing. It also allows you to make changes or amend your return if needed. Keeping your records ensures you have proof of your reported income, deductible expenses, or credits if questions come up.

Exceptions to the standard retention period

There are a few exceptions where you’ll have to hold only your records a little longer.

1. Unreported income exceeding 25%
   If you under-report your income by more than 25% of what’s shown on your return, the IRS extends the statute of limitations to six years. For example, if your income is $100,000, but you fail to report $26,000 or more, this rule applies. You should keep all the relevant tax documents for at least six years in such cases.
2. Claiming worthless securities
   If you claim a deduction for worthless securities or bad debts, you’ll need to keep records for seven years. These deductions often require extra documentation to substantiate the claim, and the IRS might need more time to review them.
3. Fraudulent or unfiled returns
   There is no statute of limitations if you don’t file a tax return or file a fraudulent return. The IRS can investigate these issues indefinitely. In such cases, you must retain your records forever to ensure you have proof of your financial activity if questioned.
4. Employment tax records
   For employment taxes, the IRS requires you to keep records for at least four years. This includes payroll tax filings, employee wage documentation, and proof of tax payments. These records are essential for both compliance and potential audits related to payroll.
5. Property and asset records
   If you own property or long-term assets, keep records until the period of limitations expires for the tax year when you sell or dispose of the asset. This can extend beyond three years. These documents help establish your basis, calculate depreciation, and determine capital