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Now that you've submitted your tax filing to the IRS, what do you do with your copy of the paperwork? What about the filing for last year and the year before? How long should you keep your business's tax records?
While the IRS has its own recommendation, there are a few other considerations you might want to take into account before sending your old return paperwork through the shredder.
The IRS generally recommends keeping records that support income, deductions, or credits for three years. This is because, in most cases, the period of limitations on tax returns is three years, so most reviews or audits only go back that far.
However, there are some exceptions. The IRS says you should keep tax records for 7 years if you have filed a claim for a loss from worthless securities or bad debt deduction, and 6 years if you do not report income that you should report and that income is more than 25% of the gross income shown on your return. You should also keep your employment tax records for at least 4 years.
If you don't file a return, or file an incorrect tax return, it's best to keep tax records from those years indefinitely -- there's no statute of limitations on auditing fraudulent tax returns.
Let's face it, most records and tax filings are done on the computer and/or online, so the records aren't taking up a huge amount of office space. Keeping records for at least seven years is the best practice for a small businesses and startups, but given the ease of record keeping and convenience of electronic storage, you might just want to hold on to them for a while.
Maintaining extensive records can help you (and potential investors, clients, and partners) accurately evaluate your company's value and performance over time. And you also never know when an IRS audit notice will show up. Keeping your tax records for as long as possible will not only help you track how your company's activity, but they may be essential information if you ever need a tax lawyer.
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