Keeping tax records: how long is enough?

Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. 

According to an IRS Auditor, you should also have a yearly backup of your accounting files on CD or a flash drive (you should in general have a yearly backup of your accounting files stored somewhere safe and it should be kept permanently).

Document Retention Guidelines

Document How Long?
Accounts payable ledgers and schedules 10 years
Accounts receivable ledgers and schedules 10 years
Audit reports of accountants Permanently
Bank statements 10 years
Capital stock and bond records Permanently
Cash books 10 years
Checks (canceled, with exception below) 10 years
Checks (canceled for taxes, property, contracts) Permanently
Contracts and leases (expired) 10 years
Contracts and leases still in effect Permanently
Correspondence, general 4 years
Correspondence (legal and important matters) Permanently
Depreciation schedules 10 years
Donation records of endowment funds (nonprofit) Permanently
Donation records, other 10 years
Deposit Summaries and copies of checks 10 years
Employee personnel records (after termination) 7 years
Employment applications 3 years
Expense analyses and expense distribution schedules 10 years
Financial statements (end-of-year) Permanently
General ledgers and end-of-year statements Permanently
Insurance policies (expired) Permanently
Insurance records, current accident reports, claims, policies, etc Permanently
Internal reports, miscellaneous 3 years
Inventories of products, materials, supplies 10 years
Invoices to customers 10 years
Bills from vendors 10 years
Journals 10 years
Minute books of Board of Directors Permanently
Payroll records 10 years
Purchase orders 3 years
Sales records 10 years
Scrap and salvage records 10 years
Subsidiary ledgers 10 years
Tax returns and worksheets Permanently
Audit Reports (IRS Findings) Permanently
Time sheets and cards 10 years
Volunteer records 3 years
Copy of accounting file yearly backups Permanently