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Document Retention in a Paperless Environment

We receive a lot of questions regarding document retention especially as the majority of people and businesses move towards a paperless environment. There are several factors to take into account as you make the transition.

How Long Should I Retain My Records?

The Internal Revenue Service’s general answer to this question is “The length of time you should keep a document depends on the action, expense, or event the document records. You must keep your records as long as needed to prove the income or deductions on a tax return. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out”. According to the IRS website, the following are the Period of Limitations that apply to income tax returns including the number of years you should retain your records:

Period of Limitations that apply to income tax returns

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.

2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.

3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.

4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.

5. Keep records indefinitely if you do not file a return.

6. Keep records indefinitely if you file a fraudulent return.

7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or shred it as stated by the IRS.

1. Are the records connected to property?

Generally, keep the records relating to property until the period of limitations expires for the year in which you dispose of the property.

2. What should I do with my records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes.

Does the IRS Accept Electronic Records?

Electronic Records are an awesome tool to use so instead of your records taking up valuable space in filing cabinets you can now scan them into an electronic storage system and shred them. But before we get shred happy, we need to make sure Electronic Records are accepted by the IRS. According to the IRS website:

All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law.

An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to electronic storage media. The electronic storage system must index, store, preserve, retrieve, and reproduce the electronically stored books and records in a legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS.

Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. The original hard copy books and records may be destroyed, provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. You still have the responsibility of retaining any other books and records that are required to be retained.

The IRS may test your electronic storage system, including the equipment used, indexing methodology, software, and retrieval capabilities. This test is not considered an examination and the results must be shared with you. If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. If not, you may be subject to penalties for noncompliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax.

How Long Do Banks Retain Your Records?

It will vary based on the specific institution’s internal policies. Therefore, this will need to be something that you confirm with your own bank before shredding your bank records. We have surveyed several banks in our area and on average the minimum timeframe the banks will keep your general bank records for ranged from 5 years after the account closes to 7 years from the date of the document. Institutions may also maintain records beyond the 5 to 7 years depending on what type of record it is.

Now it is time to take this knowledge and take the proper steps to move towards a paperless environment.

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