Keeping Tax Records: Is Three Years Enough?

As tax day quickly approaches, the question might come up as to how long tax-related records should be kept. Your company might already have a records retention plan in place for its various records and data, based on legal requirements, common industry practice, or internal policy. Or perhaps, in the case of tax-related records, you follow the generally accepted and oft-quoted 3-year tax record retention period. While at first glance this may seem sufficient, are you also considering federal and state audit limitation periods? Depending on your current retention practice or policy, this could potentially impact the time you keep such records.

Many people are aware of the federal IRS tax audit period of 3 years (or 6 years if substantial errors are identified). In fact, on its website, the IRS suggests business records be retained as long as an asset is kept plus three years.

While you certainly should be aware of and follow IRS guidelines, you need to also be aware of state tax laws and audit limitation periods. Many states follow the federal rules, but several do not. For example, Arizona and California can audit taxes four years after a return is filed (See Ariz. Rev. Stat. 42-1104 and Cal Rev & Tax Code 19057, respectively). To this end, California’s Franchise Tax Board suggests tax records be kept “within the California statute of limitations period, which is usually the later of four years from the due date of the return or the date the return is filed.” Minnesota has an audit period of three and a half years (see Minn. Stat. 289A.38), and West Virginia extends its limitation period to five years (see W. Va. Code 55-2-19a). Similar to the IRS, many states also extend tax audit periods in cases of gross or intentional errors.

Making sure your tax records are kept in alignment with such audit limitation periods helps ensure you are in compliance with federal and state requirements, and minimizes extra hassle or complications arising from insufficient or missing records during an audit procedure.

In short: Have a proper retention plan in place:  Know the tax recordkeeping laws for your federal and local jurisdictions, and be familiar with the tax audit limitation periods. Fashion a retention plan for your tax records that is responsive to the relevant legal requirements and covers your bases. Proper record keeping foresight and planning helps to avoid possible legal, compliance, or other issues down the road.

Contact Zasio today to see how our innovative products and services can meet your recordkeeping and information governance needs.

 

Disclaimer: The purpose of this post is to provide general education on Information Governance topics. The statements are informational only and do not constitute legal advice. If you have specific questions regarding the application of the law to your business activities, you should seek the advice of your legal counsel.