We are often asked about how long specific records should be kept. Discarding records that should be kept poses a wide range of potential tax and legal problems. Keeping them too long wastes precious space and resources. But how long should the firm's files be kept? The answer varies depending on firm policies and the type of files. Generally, the files should be kept as long as they serve a useful purpose or until all legal and regulatory requirements are met.
Businesses often base how long they keep files on the length of the statute of limitations for breach of contract, breach of fiduciary duty, and professional liability claims. The statutes, of course vary with each state.
As to your tax records, the statute of limitations period for income tax returns is generally three years. It is six years if there is a substantial understatement of gross income. A good rule of thumb is to add a year to the statute of limitations period. Using this approach, taxpayers should keep most of their income tax records a minimum of four years, but it may be more prudent to retain them for seven years. Regardless of the tax assessment periods, taxpayers should retain certain records for longer periods, and in some cases, indefinitely. Tax returns, results of an audit by a tax authority, general ledgers, and financial statements should normally be kept indefinitely.
Download our sample Records Retention Guidelines HERE.