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Tax season can be stressful for business owners. When the deadline approaches, there’s plenty to keep track of, including receipts, deductions, and even old tax returns. Many go out of their way to find old tax returns, sometimes returning to records from years past. But doing so is not just a matter of organization and peace of mind; it can also have important implications for corporate tax accounting. This blog will discuss how long to keep business tax returns, so you know what to do if you get an audit notice. If you’re looking for a guide for business owners on tax returns, you’re in the right place.
At Haven, we offer accounting services for small businesses to help you organize your tax returns and understand your obligations.
Table of Contents
How Long to Keep Business Tax Returns: IRS and Official Tax Record Retention Rules
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How Long to Keep Business Tax Returns: IRS and Official Tax Record Retention Rules
The IRS provides clear guidance on how long businesses should retain tax returns and related documentation. The duration depends mainly on the period of limitations, which is the time frame during which you can amend a tax return or the IRS can assess additional tax.
Standard Rule: The Three-Year Guideline
Under the IRS’s standard rule, you should keep business tax returns and all supporting records for at least three years from either:
The date you filed the return, or
The return’s due date (whichever is later).
This aligns with the IRS’s base statute of limitations for audits, meaning that in most cases, the IRS has three years to examine your return or assess additional tax.
Supporting Documents
Items that support entries on your tax return, such as receipts, invoices, payroll files, and expense reports, should also be kept for at least three years. Best practice is to organise these documents by tax year, keeping them grouped with their corresponding return to simplify audits or amendments.
When to Keep Records Longer
Certain circumstances require holding on to tax records beyond the three-year rule:
Underreported Income: If you understate income by more than 25%, the IRS can audit up to six years after the filing date.
Unfiled or Fraudulent Returns: There is no statute of limitations if you fail to file a return or file fraudulently.
Employee Records: Payroll tax records must be retained for at least four years after the tax is due or paid, whichever is later.
Complex Filings or Significant Deductions: Businesses with large deductions, depreciation schedules, or credits may need to keep documents for seven years or more for reference and support.
Federal vs. State/Local Requirements
While the IRS sets federal rules, state and local tax authorities may impose longer retention requirements. For example, some states recommend keeping returns for seven years to account for extended audit periods or differing statutes of limitations. It’s essential to verify the specific requirements in each state where your business files taxes.
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Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses.
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Factors That Affect Retention Time
The IRS typically has three years from the date you file your return to audit it or assess additional tax. This period extends to six years if you underreport your income by more than 25%. For example, if you report $100,000 but omit $26,000 or more, the IRS has six years to investigate. In such cases, you should keep all related tax records for at least six years.
Fraudulent or Unfiled Returns
If a tax return is never filed or is filed fraudulently, there's no statute of limitations. The IRS can investigate indefinitely. In these scenarios, records should be retained permanently to ensure you have documentation in case of an issue.
Claiming Worthless Securities or Bad Debts
When claiming deductions for worthless securities or bad debts, you must keep documentation for seven years. These deductions often involve complex evidence requirements, and the IRS allows additional time to review such claims.
Employment Tax Records
Businesses with employees must maintain payroll and employment tax records for at least four years after the tax is due or paid, whichever is later. These include wage documentation, tax filings, and proof of tax payments, all of which are essential for compliance and potential audits related to payroll taxes.
Property and Asset Records
If you own property or other long-term assets, retain records until the statute of limitations expires for the year in which the asset is sold or disposed of. This often extends beyond three years because these records are necessary to establish cost basis, calculate depreciation, and determine capital gains or losses.
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Types of Records to Retain Alongside Tax Returns
Gross receipts are the income you receive from your business and can come from many sources. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
Cash register tapes
Deposit information (cash and credit sales)
Receipt books
Invoice
Forms 1099-MISC
Purchases
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products.
Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item to show that the amount was for purchases. Documents for purchases include the following:
Canceled checks or other documents reflecting proof of payment/electronic funds transferred
Cash register tape receipts
Credit card receipts and statements
Invoices
Note: A combination of supporting documents may be needed to substantiate all elements of the purchase.
Expenses
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense. Documents for expenses include the following:
Canceled checks or other documents reflecting proof of payment/electronic funds transfer
Cash register tape receipts
Account statements
Credit card receipts and statements
Invoices
Note: A combination of supporting documents may be needed to substantiate all elements of the expense.
Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) some aspects of the costs. For additional information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Assets
Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:
When and how you acquired the assets
Purchase price
Cost of any improvements
Section 179 deduction taken
Deductions taken for depreciation
Deductions taken for casualty losses, such as losses resulting from fires or storms
How you used the asset
When and how you disposed of the asset
Selling price
Expenses of sale
The following documents may show this information:
Purchase and sales invoices
Real estate closing statements
Canceled checks or other documents that identify the payee, the amount, and proof of payment/electronic funds transfer
Employment Taxes
There are specific employment tax records you must keep. Keep all records of employment for at least four years.
4 Best Practices for Organizing and Storing Tax Records
1. Organise by Tax Year: Stay Ahead of Audits with Easy-to-Navigate Tax Records
Set up a system to handle your tax records before you need to. Efficiently organising your tax documents will help you stay on top of compliance and audits. Start by creating clearly labelled folders for each tax year, whether physical or digital.
Within each folder, separate returns, supporting documentation (receipts, invoices, payroll files), and any correspondence from the IRS or state tax authorities. This approach simplifies audits and makes it easy to locate information quickly.
2. Secure Storage and Backups: Protect Your Confidential Tax Records
Keep tax records in a safe location. For physical files, use lockable cabinets or safes to prevent unauthorised access. For digital records, consider encrypted cloud storage or password-protected drives. It is also advisable to scan and digitise paper records so you have backups in case of damage or loss.
3. Safe Disposal of Expired Records: Destroy Old Tax Records Properly to Prevent Identity Theft
Once the applicable retention period has passed, dispose of outdated records securely. For paper documents, use a cross-cut shredder to protect against identity theft. For digital files, use secure deletion methods or data-wiping tools to ensure they cannot be recovered.
4. Seek Professional Guidance: Consult a Tax Expert to Develop a Record Keeping System
Retention timelines can vary based on your business structure, industry, and the types of deductions claimed. Consulting a qualified accountant or tax adviser can help clarify how long specific documents should be kept and ensure your record-keeping practices meet both IRS and state requirements.
Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)
Let your business take flight while Haven manages your financial runway. Built by founders for founders, we handle everything from daily bookkeeping to complex tax filings and R&D credits that put cash back in your pocket, as well as fractional CFO services.
Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses.
Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.
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