How long should you hold on to tax records?
Dear Clients and Friends,
As a former IRS attorney and with 40+ years in private practice, we continue to represent clients at all levels in tax-collection defense matters: audits, appeals, US Tax Court and beyond. Available tax records are game changers and that leads to the question – How long should you hold on to tax records? Below are the rules for your review.
Do not despair – volumes of tax collection matters are satisfactorily resolved without all of the taxpayers records being available. Estate Planning and Bankruptcy factors are also a part of a taxpayer’s options in dealing with Federal and State tax issues and calling us if and when this becomes an issue is all that one need do at this time – save for keeping good records from here on out.
Even if you’re a taxpayer with simple returns and few supporting documents, you can become a little snowed under by tax records as they accumulate over the years, raising the question of how long you should hold on to such records. The answer depends on the types of documents and transactions involved, but if you have been a tax records pack rat for many years, chances are you can safely dispose of the oldest such records without inviting trouble.
As a starting point, you must keep tax records that support the income, deductions, and credits on your tax return, and you should also keep copies of the returns themselves. As for how long to retain the records, a good rule of thumb is to keep them until the limitations period runs out for the return in question.
The “ limitations period” refers to the amount of time you have to amend a return to claim a credit or a refund or in which the IRS can assess additional taxes. As a general rule, the limitations period for a return is three years after it has been filed, but if you file early, the period runs from the date the return was due to be filed.
For most general rules there are exceptions, and that is the case with keeping tax records. If you failed to report income in an amount that is more than 25% of the gross income shown on your return, keep the records for six years, not three. If you filed an amended return to get a credit or refund, keep the records for either three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.
After filing a claim for a loss from worthless securities or a bad-debt deduction, hang on to any relevant records for seven years. Employers should retain all employment tax records for at least four years after the tax was due or has been paid, whichever is later.
If you did not even file a return or filed a fraudulent return (it has been known to happen), all of the above rules are out the window, because the limitations period never expires. Keep those records indefinitely. Also, even if you did not amend a return, some types of records should be kept for extended periods. Among the records in this category are those relating to securities and real estate, nondeductible contributions to retirement accounts, and home improvement expenditures.
For the space-conscious among us, the good news is that retaining even voluminous amounts of tax records these days may not have to take up any more room than the space occupied by your computer. The IRS allows tax-payers to store tax documents electronically, whether they originated electronically or on paper.
We invite you to call us for a free phone evaluation if you or yours have a tax audit or tax collection matter.