Many taxpayers hoard records such that they can be appropriately prepared “if and when” an IRS examination occurs. Others often inquire as to which records should be maintained and for how long. Some routinely destroy relevant documents on the mistaken belief that an examination result will somehow be enhanced if certain documents simply don’t exist.
The length of time documents should be retained often depends upon the action, expense, or event the document records. Generally, records that support an item of income or deduction on a tax return should be retained until the applicable statute of limitations for that return runs out. The statute of limitations is the period of time in which return can be amended to claim a credit or refund, or that the IRS can assess additional tax. Returns filed before the due date are treated as filed on the due date.
General Rule. The general federal statute of limitations is 3 years from the filing date of the return. Many states have statutes that are one year beyond the expiration of the federal statute of limitations. However, the federal statute of limitations can be extended to 6 years in certain situations where there has been an omission of more than 25% of the gross income required to be hown on the return and is indefinite in the event of a civil fraud determination or the failure to file a return.
Taxpayers should keep copies of filed tax returns for at least 6 tax years to help in preparing future tax returns and making computations if an amended return is required. Generally:
If the taxpayer owes additional tax and situations (2) and (3), below, do not apply; keep records for 3 years.
If there is an omission of more than 25% of the gross income required to shown on the return; keep records for 6 years.
If a return is not filed; keep records indefinitely.
If a claim for credit or refund is filed after the filing of the original return; keep records for 3 years from the date the original return was filed or 2 years from the date the tax was paid, whichever is later.
If a claim for a loss from worthless securities or bad debt deduction was filed; keep records for 7 years.
Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Are the records connected to assets? Keep records relating to property until the period of limitations expires for the year in which the property is disposed of in a taxable disposition. These records will be relevant for purposes of determining any depreciation, amortization, or depletion deduction and to figure the gain or loss upon disposition of the property.
Generally, for property in a nontaxable exchange, the tax basis in that property is the same as the bases of the property transferred, increased by any money paid for the acquisition. Retain records applicable to the old property, as well as on the new property, until the period of limitations expires for the year in which the new property was disposed of in a taxable disposition.
When records are no longer needed for tax purposes, do not discard them until determining whether the records might be needed for other purposes such as for insurance purposes.
Many people have moved forward into the electronic world and operate within a paperless environment. Electronic storage of relevant documents provides a hassle free method of retaining documents far beyond the confines of an upper shelf in a closet or garage. If comfortable with a paperless environment, consider retaining rather than destroying documents for a considerably longer period of time than referenced above.