Record Retention Periods for Businesses


	Gerry Henderson

November 2009

Record Retention Periods for Businesses

Taxpayers may be subject to penalties if their records are destroyed prematurely

The IRS requires that taxpayers maintain, for certain time periods, their books and records and other documents that support their tax return information. These rules ensure that your records will be available to the IRS in the event of a tax audit.

Generally, the record retention period is based on the three-year statute of limitations period in which the IRS may assess a deficiency or the taxpayer may file an amended return. This period runs from the due date of your income tax return or, if later, the date you file that return.

For example, if you are a calendar year corporation, your 2009 income tax return is due March 15, 2010, and the three-year period will expire on March 15, 2013. However, if you filed your return for that year on the extended due date (September 15, 2010) or later (e.g., November 1, 2010), the three-year period will lapse three years from the date you actually filed your return (September 15, 2013, or November 1, 2013, as the case may be).

Exceptions. In some circumstances, the three-year period may be extended or eliminated altogether. For example:

A six-year statute of limitations applies to taxpayers that have substantially understated their income (i.e., omitted more than 25% of the gross income required to be reported in the return).
A seven-year period applies to taxpayers who claim a bad debt or worthless stock deduction.
There is no time limit if the IRS determines that the tax return is fraudulent or was never filed. In that case, the IRS may assess tax at any time.

We generally advise clients, in the interest of caution, to add a year to the three-year limitations period. As an extra precaution, taxpayers may wish to retain their records for seven years, as has been informally suggested by the IRS.

Our Records Retention Schedule offers detailed information on retention periods for general business records and health care records. Order your free copy by calling 480-834-6030.

Data Storage. IRS rules permit the records to be stored electronically rather than in paper format. A taxpayer may generally destroy its original hard copies and maintain computerized records, but state requirements may differ from the IRS rules.

The IRS has published guidance for maintaining computer records (Rev. Proc. 98-25) and for maintaining records on an electronic storage system (Rev. Proc. 97-22). The computer records maintenance rules dictate how taxpayers with at least $10 million of assets at year-end must retain their accounting and financial data on a computerized system, if not maintained manually, for future IRS examination or audit. These rules may apply to smaller taxpayers who use computers to support their tax return items or to calculate their tax liability.

Businesses should establish document destruction policies to avoid the loss of important data and to avoid penalties imposed by the IRS and the courts. Taxpayers should be able to show that their records were destroyed in the ordinary course of their business and that their policy complies with federal and state record retention policies.

Taxpayers may be subject to penalties if their records are destroyed and are not available for audit or litigation purposes, or if they deliberately destroyed their records to eliminate any potential incriminating information.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.