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How long should a business keep its records?

This question is regularly asked by our clients. Retention of financial records can be time-consuming, and many times will require a significant amount of floor space to keep these records.

Some of our clients are hesitant to throw any records away and will have store-rooms filled with every piece of paper for all prior years.  Other clients will want to destroy records as soon as possible.

As a result of this, articles are published regularly addressing this issue.

The standard advice for record retention is to keep records for at least six years. This is based on IRS audit statutes. IRS audits generally can go back for the three prior years. If there is a ‘substantial omission of gross income’ the statute will be six years. Thus, the basis for six-year retention advice is that the IRS can, in some cases, go back for six years to audit.  (If more than 25% of gross income is omitted then the three-year statute extends to six years.)

I find that this advice, while it will cover most situations, does not full address the issue – record retention is much more complicated and should be approached differently.

The statutes of limitations (the number of years that are open for audit or challenges) are different for different areas of the law.  This includes federal tax laws, state and local tax laws and civil litigation issues.

Examples of these different statutes of limitations include the following:

The original documents and receipts of a business may be required to be maintained for a number of different situations each of which may have a different statute of limitations.

For most businesses and in most situations a six-year retention policy will be sufficient.  There are situations in which this policy is not adequate.  I would recommend that a business review the various potential issues, including a brief discussion with legal counsel, before disposing any business records.