Arizona Contractors License Practice Exam

How long should employees retain tax records?

1. At least 2 years

2. At least 3 years

3. At least 4 years

4. At least 5 years

The correct answer is: At least 4 years

The recommended period for retaining tax records is at least four years. This timeframe aligns with IRS guidelines regarding the retention of documentation that supports income and deductions reported on tax returns. In general, the IRS advises keeping tax records for three years after the due date of the return or the date it was filed, whichever is later. However, if any part of the return was understated by more than 25%, the IRS may extend the period to six years. Since tax records need to be retained until the possibility of audit or inquiry is fully resolved, maintaining them for at least four years is prudent. This covers the standard auditing period while also ensuring that in case of any complex situations with income or deductions, you have sufficient documentation readily available. Thus, retaining tax records for four years not only complies with regulations but also minimizes the risk of issues arising from potential audits.