Record Retention FAQ

Record Retention FAQ

Proper record retention protects you in the event of an IRS audit, a California Franchise Tax Board (FTB) examination, or a business dispute. This FAQ answers the most common questions we receive from our clients about how long to keep financial and tax records.

General principles

  • The IRS and California FTB have defined windows during which they may audit your returns or assess additional taxes. If you cannot produce supporting documentation within those windows, you may be unable to substantiate deductions, credits, or income figures—potentially resulting in additional taxes, penalties, and interest.

    Beyond taxes, records support your ability to file insurance claims, prove ownership, resolve disputes with employees or vendors, and comply with industry regulations.

  • The statute of limitations is the period during which a taxing authority can audit your return and assess additional tax. Key federal and California rules:

    • Federal (IRS): Generally 3 years from the later of the return due date or the date filed. Extended to 6 years if you omit more than 25% of gross income. No limit if the return is fraudulent or was never filed.

    • California FTB: Generally 4 years (one year longer than federal). Extended to 8 years for understatement of more than 25% of gross income.

    • California CDTFA (sales & use tax): Generally 3 years; up to 8 years for fraud or failure to file.

    Practical tip: Because California’s statute runs one year longer than federal, we generally recommend keeping most tax records for at least 7 years to cover both.

  • Start the clock from whichever is later: the original due date of the return (e.g., April 15) or the actual filing date. If you filed for an extension and filed late, use the actual filing date. For amended returns, the period restarts from the amended filing date for items changed on that return.

Individuals

  • We recommend keeping the actual signed returns permanently (they take up little space and serve as a lifelong financial record). Keep all supporting documents for at least 7 years:

    • W-2s, 1099s, K-1s, and other income statements

    • Charitable contribution receipts and acknowledgment letters

    • Mortgage interest statements (Form 1098) and property tax receipts

    • Investment purchase and sale confirmations (to document cost basis)

    • Medical expense receipts, if itemizing

    • Home office records, mileage logs, and business expense documentation

    California note: California does not conform to all federal deduction rules, so retain California-specific records (e.g., mortgage interest on a second home, certain credits) separately.

  • Keep records related to the purchase, improvement, and sale of your home for as long as you own it, plus at least 7 years after you sell. This includes:

    • Closing disclosure / HUD-1 settlement statement from purchase

    • Receipts and contracts for all capital improvements (roofing, additions, HVAC, etc.)

    • Closing documents from the sale

    Why: Your cost basis in the home, which determines taxable gain on sale, is reduced by depreciation and increased by capital improvements. California has its own exclusion rules (mirroring federal Section 121), and the FTB may ask you to document basis.

    Bay Area relevance: Given the high property values in the Bay Area, even taxpayers who qualify for the $250,000/$500,000 exclusion may have taxable gain. Meticulous records are essential.

  • Keep all brokerage statements and trade confirmations until you sell the security, plus 7 years after the tax year of sale. Specifically:

    • Purchase confirmations (to establish cost basis)

    • Dividend reinvestment records

    • Records of stock splits, spin-offs, and mergers that affect basis

    • Annual brokerage statements showing covered vs. non-covered lots

    Brokers are required to report cost basis to the IRS for “covered” securities purchased after specified dates. For older “non-covered” securities, you are solely responsible for documenting basis.

  • Retirement account records require special attention because some contributions are nondeductible:

    • Keep Form 8606 (Nondeductible IRAs) permanently; it tracks your after-tax basis and affects the taxability of future distributions.

    • Keep annual IRA and 401(k) statements until the account is fully distributed, plus 7 years.

    • Keep records of Roth IRA contributions permanently to document the five-year rule and basis.

    California does not recognize Roth IRA treatment in the same way as federal law for certain early distributions, so keep California-specific basis records as well.

Business clients

  • The general rule for business records mirrors the tax statute of limitations: keep records supporting any item on a tax return for at least 7 years. However, several categories require longer retention:

    • Corporate minutes, resolutions, and formation documents: permanently

    • Contracts and agreements: length of contract plus 7 years

    • Payroll records: at least 8 years (see Section 4 for California payroll specifics)

    • Property and depreciation schedules: life of the asset plus 7 years

    • Shareholder / partner agreements and capital account records: permanently

  • Yes. Pass-through entity owners must track their basis in the entity, which can be complex and spans many years. Retain:

    • All Schedule K-1s received, permanently (basis tracking requires a continuous record)

    • Records of loans to or from the entity

    • Capital contribution and distribution records

    • At-risk and passive activity loss records until the activity is fully disposed of

    Bay Area note: California imposes an annual minimum franchise tax and LLC fee on most pass-through entities. Keep California entity returns and fee payment records for at least 8 years.

  • California Department of Tax and Fee Administration (CDTFA) rules require businesses to retain sales and use tax records for at least 4 years, though we recommend 8 years given the extended statute for underreported amounts. Retain:

    • Sales invoices and receipts

    • Purchase invoices (to document use tax obligations)

    • Exemption certificates received from customers

    • Resale certificates issued to suppliers

    • Sales tax returns and CDTFA correspondence

  • You must keep records for any depreciable or amortizable asset for the life of the asset plus at least 7 years after disposal. This applies to real property, vehicles, equipment, software, and intangible assets. Records should include:

    • Purchase invoice and closing documents

    • Evidence of business use percentage (for mixed-use assets)

    • Section 179 and bonus depreciation election records

    • Disposition records (sale price, date, buyer)

California employment records

  • California has some of the strictest employment record requirements in the country. Under the California Labor Code and regulations enforced by the Division of Labor Standards Enforcement (DLSE) and the Employment Development Department (EDD):

    • Payroll records (wages, hours, deductions): 3 years under federal FLSA; California requires 3 years but the DLSE may look back further—retain 8 years to be safe.

    • Time records (hourly employees): 3 years minimum; we recommend 4 years given California’s wage claim statute of limitations.

    • Form DE 9 (Quarterly Contribution Return) and DE 9C: 4 years

    • I-9 Employment Eligibility forms: 3 years from hire date or 1 year after termination, whichever is later

    • Workers’ compensation records: 5 years from date of injury or illness

    California’s Private Attorneys General Act (PAGA) allows employees to file wage claims on behalf of the state. A strong payroll record is your best defense.

  • Given California’s AB 5 and related legislation, the worker classification question can arise long after a project ends. Retain:

    • Contracts and statements of work

    • Form 1099-NEC copies and Form DE 542 (Report of Independent Contractors to EDD): 4 years

    • Evidence supporting independent contractor status under the ABC test

    • Payment records and invoices: 7 years

Quick-reference retention table

Record / Document Type Federal / IRS CA FTB / BOE / DLSE
Individual income tax returns (federal & CA) Permanent Permanent
Supporting docs for tax returns (W-2s, 1099s, receipts) 7 years 8 years
Investment purchase/sale confirmations Until sold + 7 yrs Until sold + 7 yrs
Form 8606 (IRA basis) Permanent Permanent
Home purchase & improvement records While owned + 7 yrs While owned + 7 yrs
Business income tax returns Permanent Permanent
Business supporting documents 7 years 8 years
Corporate minutes & formation docs Permanent Permanent
Schedule K-1s (pass-through entities) Permanent Permanent
Contracts & agreements Term + 7 yrs Term + 7 yrs
Accounts payable / receivable ledgers 7 years 8 years
Sales & use tax records 4 years 8 years
Fixed asset / depreciation records Life of asset + 7 yrs Life of asset + 7 yrs
Payroll records (wages, hours, deductions) 3 years (FLSA) 8 years (recommended)
Time records (hourly employees) 3 years 4 years
Form DE 9 / DE 9C (CA payroll returns) 4 years 4 years
Form I-9 (Employment Eligibility) 3 yrs from hire or 1 yr after term Same
1099-NEC / contractor records 4 years 4 years
Workers' compensation records 5 years from injury 5 years from injury
Bank statements & canceled checks 7 years 8 years
Insurance policies (expired) Permanent Permanent
CDTFA exemption/resale certificates 4 years after transaction 4 years after transaction

Electronic records and digital storage

  • Yes. Both the IRS (Rev. Proc. 98-25) and the California FTB accept electronic records, provided they are complete, accurate, and accessible for examination. Key requirements:

    • Records must be capable of being reproduced in a legible and readable format.

    • Electronic storage systems must index, store, preserve, retrieve, and reproduce records.

    • You must maintain the hardware and software needed to access the records throughout the retention period.

    Scan physical documents at a minimum resolution of 300 DPI in a non-proprietary format (PDF/A recommended). Keep originals until you have confirmed the scan is complete and legible.

  • Given the sensitivity of tax and financial records, we recommend:

    • Use the 3-2-1 rule: 3 copies of data, on 2 different media, with 1 offsite (or cloud) backup.

    • Encrypt stored records and use strong password protection.

    • Store cloud backups with a reputable provider that offers data redundancy and SOC 2 certification.

    • Test restoration procedures at least annually.

    • Maintain a record inventory so you know what you have and where it is.

Secure disposal

  • Never simply throw away financial or tax records—identity theft is a serious risk. Proper disposal methods:

    • Paper records: Cross-cut shred (strip-cut shredders are insufficient for sensitive data). For large volumes, use a certified document destruction service that provides a Certificate of Destruction.

    • Electronic records: Use NIST 800-88-compliant wiping software for hard drives. For solid-state drives or media that cannot be reliably wiped, physical destruction is recommended.

    • California note: Under the California Customer Records Act (Civil Code § 1798.81), businesses are required to destroy customer records, including financial information, in a manner that makes them unreadable or undecipherable.

  • Yes, particularly for businesses. A destruction log documents that records were destroyed in the ordinary course of business pursuant to a retention policy, not selectively to obstruct an investigation. Log entries should include: the record type, date range covered, destruction date, method used, and name of the person who authorized or performed the destruction.

Special situations

  • Issue a “legal hold” (also called a litigation hold) immediately. All routine destruction of records potentially relevant to the audit or dispute must stop. Destroying records after receiving notice of an audit or lawsuit, even pursuant to an otherwise valid retention policy, can result in severe sanctions, adverse inference instructions, or obstruction charges.

    Notify your CPA and legal counsel as soon as you receive an audit notice or anticipate a claim.

  • When a California business entity dissolves, the obligations to retain records do not disappear immediately. Retain all tax returns and supporting documents for at least 8 years from dissolution. Employment records should be retained as described in Section 4. Designate a custodian, typically a principal or successor entity, responsible for maintaining and accessing records post-dissolution.

    California requires a formal dissolution process (Certificate of Dissolution filed with the Secretary of State). The FTB requires a final tax return and will not release the entity from liability until all taxes are paid.

  • Yes. Many industries have record retention obligations that exceed standard tax requirements. Examples relevant to Bay Area businesses include:

    • Healthcare (HIPAA): Medical records for adults must be retained 6 years from creation or last effective date; California requires 10 years for adult patient records.

    • Financial services / broker-dealers (FINRA/SEC): Various records for 3–6 years depending on type.

    • Government contractors: FAR-mandated retention of 3–7 years depending on contract type.

    • Public companies (SOX): 7 years for audit workpapers and related records.

    If your business operates in a regulated industry, consult with both your CPA and legal counsel to layer these requirements on top of the general guidance above.