I received an alert from my friends at KraftCPAs yesterday with the following subject line: "How long should your keep you tax records?"
The post by Morganne Keel contains some very basic, succinct and easy-to-implement ideas for document retention of tax records, including the following:
Keep at least three years, but six year may be better. The following records are commonly used to substantiate a taxpayer’s income and expense items:
- Form(s) W-2
- Form(s) 1099
- Form(s) K-1
- Bank and brokerage statements
- Canceled checks or other proof of payment of deductible expenses
At a minimum, the above tax records should be kept for a three-year period following the date that you file your return (or its due date, if later). However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, retain the above documents for at least six years to better protect yourself in the event of an audit.
Pass-through business entities
If you are an owner in a subchapter S corporation, LLC, LLP, or a limited partnership, you should retain a copy of the annual Form K-1 for as long as you own an interest in the entity plus seven additional years. Also, keep any paperwork related to the sale or other disposition of your interest for at least seven years after the disposition.
Corporate income tax returns
It is highly advisable that you retain copies of all corporate tax returns indefinitely.
For construction companies, I think Morganne is right on track for retention of tax records, particularly in this day and age of electronic storage. It is not too difficult to maintain these types of documents indefinitely in the event of an audit.
In the construction industry, the next question becomes: How long do you keep project records? Project documents, including the contract, change orders, correspondence, drawings, specifications, daily logs, field notes, monthly reports, schedules, etc., should be kept and stored for at least as long as the applicable statute of limitations or repose period for the state in which your project is located. Here is a good explanation of a statutes of limitations and repose for construction defect claims and how it applies to disputes. In short, if your particular jurisdiction has a 10-year statute of repose, then you should keep you records maintained for at least 11 years.