Record Retention Guide
Federal law requires you to maintain copies of your tax returns and supporting documents for up to 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 minimum period of time. However, if the IRS believes you have significantly underreported your income (by 25% or greater), or believes there may be an indication of fraud, it may go back six years in an audit.
To be safe, use the following guidelines.
Create a Backup Set of Records and Store Them Electronically. Keeping a backup set of records (such as tax returns, insurance policies, and bank statements) is easier than ever now than ever. Most financial institutions can provide statements and documents electronically either by logging into your personal account or requesting an electronic copy. If the original records are only sent to you on physical paper, you can easily scan and converted them to a digital format. Once the documents are in electronic form, taxpayers can download them to a backup storage device, such as an external hard drive, or burn them onto a CD or DVD. Another option to consider is an online backup, which is the only way to ensure that data is fully protected. With online backup, files are stored in the 'cloud' and can be accessed from any place at any time.
Caution: Identity theft is a serious threat in today's world, and it is important to take every precaution to avoid it. After it is no longer necessary to retain your tax records, financial statements, or any other documents with your personal information, you should dispose of these records by shredding them and not disposing of them by merely throwing them away in the trash.
Business Documents To Keep For 1 Year
While federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.