Tax Season Cleanup: Which Records Can You Toss?

If you’ve filed your 2024 tax return, you may be eager to do some spring cleaning, starting with tax-related paper and digital clutter. The documentation needed to support a tax return may include receipts, bank and investment account statements, K-1s, W-2s, and 1099s. How long must you save these records? Three years is the general rule. But don’t be hasty: Failure to keep a paper trail for the information reported on a tax return could lead to problems if the IRS audits it.

The basics

Generally, the IRS’s statute of limitations for auditing a tax return is three years from the return’s due date or the filing date, whichever is later. However, some tax issues are still subject to scrutiny after three years. If the IRS suspects that income has been understated by 25% or more, the statute of limitations for audit rises to six years. If no return was filed or fraud is suspected, there’s no limit on when the IRS can launch an inquiry.

It’s a good idea to keep copies of your tax returns indefinitely as proof of filing. Supporting records, such as canceled checks, charitable contribution receipts, mortgage interest payments, and retirement plan contributions, generally should be kept until the three-year statute of limitations expires. These documents may also be helpful if you need to amend a return.

So, which records can you throw away now? Based on the three-year rule, in late April 2025, you’ll generally be able to discard most records associated with your 2021 return if you filed it by the April 2022 due date. Extended 2021 returns could still be vulnerable to audit until October 2025. But if you want extra protection, keep supporting records for six years.

Records to keep longer

You need to hang on to some tax-related records beyond the statute of limitations. For example:

• Retain W-2 forms until you begin receiving Social Security benefits. That may seem long, but if questions arise regarding your work record or earnings for a particular year, you’ll need your W-2 forms to help provide the required documentation.
• Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection).
• Hang on to records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years.
• Retain records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses, until they have no effect, plus seven years.
• Keep records that support deductions for bad debts or worthless securities that could result in refunds for seven years because you have up to seven years to claim them.

 

Feel free to contact the office if you’re unsure about a specific document.

Retention times may vary

Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition of lending money, approving a purchase or otherwise doing business with you. Contact the office with questions or concerns about tax-related recordkeeping.

 

Payroll Fraud Threats Inside And Outside Your Company

Payroll fraud schemes can be costly. According to a 2024 Association of Certified Fraud Examiners (ACFE) study, the median loss generated by payroll fraud incidents is $50,000. It’s essential to know the payroll schemes making the rounds and how to prevent them or at least catch them before they go on very long.

Common threats

Here are brief descriptions of some common payroll fraud threats:

Ghost employees. Perpetrators add made-up employees to the payroll. The wages of these “ghost employees” are deposited in accounts controlled by the fraudsters.

Excessive payments. Here, employees receive overtime pay by inflating their work hours.

Payroll diversion. Cybercriminals use phishing emails to trick employees into providing sensitive information, such as bank login credentials. This becomes a form of payroll fraud when they divert payroll direct deposits to accounts they control. Crooks might also target employers by sending them fake emails from “employees” requesting changes to their direct deposit instructions.

Expense reimbursement fraud. Employees receiving expense reimbursements might inflate their expenses, submit multiple receipts for the same expense, or claim nonexistent expenses. When perpetrated by employees, this is related to payroll fraud because reimbursements are often added to paychecks.

6 strategies for preventing or uncovering payroll fraud

Preventing payroll fraud and uncovering it quickly, if it still occurs, requires strong internal controls. Here are six strategies to strengthen your defenses:

1. Require two or more employees to make payroll changes, such as pay rates or adding or removing employees.

2. Flag excessive or unusual pay rates, hours, or expenses using exception reporting.

3. Closely monitor employee expense reimbursement requests. Notify employees when discrepancies are found and require corrections.

4. Regularly conduct payroll audits to detect anomalies.

5. Audit automatic payroll withdrawals to confirm proper transfers are made.

6. Allow changes to direct deposits only via email confirmation, requiring employee approval before processing. For example, ask the employee to verify that he or she requested the change.

In addition to employing fraud prevention strategies, educate employees about payroll schemes, phishing attacks, and the importance of not sharing sensitive information via email. According to the 2024 ACFE study, the median fraud loss for victim organizations that provided fraud training to executives, managers and employees was roughly half the loss reported by organizations without training programs.

Payroll fraud is widespread

Payroll fraud can threaten businesses of all sizes and industries. Your organization can mitigate the risk by understanding the forms of payroll fraud and implementing robust internal controls, frequent audits and employee training.