Business owners should keep financial records for future reference and to prove their claims if the IRS comes knocking at their door. How long a financial document should be kept depends on what information it records – can be an expense or details related to an action or event.

Many accountants, lawyers, and professional bookkeepers recommend keeping records for at least seven years so businesses can substantiate their claim, argument, or opinion in case an individual or organization brings a financial fraud lawsuit against them or can create a tax audit defense in case the IRS launches a financial investigation.

Specific Documents

➢ Business tax returns and supporting records: Keep them until the IRS can no longer audit your returns. In most cases, the IRS can’t audit tax returns after three years. That period extends to six years if the IRS believes that the taxpayer made a serious error while filing tax returns

➢ Current employee files: Experts recommend preserving an employee’s files at least seven years after they resign, are terminated or retire. If an employee files a claim against you or gets injured at work, keep their file for 10 years after the claim is resolved

➢ Payroll tax records: Keep time sheets and other important documents that contain details related to pension payments, tax deposits, benefits, tips and wages for at least four years after the date taxes fell due or you filed your returns, whichever is later

➢ Operational records: Businesses should keep credit card statements, canceled checks, checkbook stubs, cash receipts and bank account statements for at least seven years

➢ Accounting records: Many accountants recommend preserving check registers, profit and loss statements, audit reports, cash books and general ledgers permanently. Keep these documents for at least seven years

Why Keep Financial Records?

Financial records help you:
➢ Monitor business performance. You can use financial records to identify areas for improvement
➢ Validate information included in your tax returns
➢ Keep track of deductible expenses
➢ Identify sources of your income

General Recommendations

➢ When you file a claim for refund or benefit, keep all your financial records for three years from the date you pay your taxes
➢ If you file a claim for a loss from securities, or a bad debt deduction, preserve financial documents for seven years

Please note that these are general recommendations. If you are looking for further, more detailed advice for your bookkeeping, reach out to an accounting firm near you. A team of experts can help you determine exactly how long you should keep your financial documents.

Financial Record Keeping Mistakes to Avoid

➢ Not using a separate archive for financial records: When you treat your financial record like any other record and list it in the common archive, important financial documents can get mixed with other documents, and you may have difficulty accessing them

➢ Not sticking to a schedule: If you do not follow a schedule for auditing, storing, and destroying financial documents when their life cycle is complete, chaos may ensue

Virtual Jeannie Bookkeeping Services is trusted bookkeeping and accounting firm in Santa Rosa. We help businesses create and implement solid bookkeeping and document preservation strategy. To learn more, call (707)664-1425.