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Tax Document Retention Guidelines: To Save Or Shred?, That Is The Question

While it’s a good idea to save certain tax documents once your tax returns have been filed, if your filing cabinet is overflowing with years’ worth of tax returns, receipts, canceled checks, bank and brokerage statements, and other financial records, there are certain items you can likely safely destroy. The following retention guidelines for both individuals and businesses are good roadmaps to follow so that you’re confident you’ve retained what you may later need while eliminating what you no longer do.

Guidelines for Individuals

In general, you should retain records that support items shown on your individual tax return until the statute of limitations runs out.  The normal statute of limitations is regarded as three years from the due date of the return or the date you filed, whichever is later. In example, now that it’s 2017, it’s basically safe to throw out records for the 2013 tax year if you filed the return for that year in April of 2014.

However, in some cases, the statute of limitations extends beyond three years. If you understate your Adjusted Gross Income by more than 25%, for instance, the limitations period jumps to six years. And there’s no statute of limitations if you fail to file a tax return or if you file a fraudulent one.

You can also file an amended return on Form 1040X during the general three year statute of limitations period if you missed a deduction, overlooked a credit or misreported income.

Some guidelines for specific documents include:

  • Tax returns. Consider holding on to a copy of your tax return, as filed, indefinitely. That way, you can prove to the IRS that you actually filed. At the very least, hang on to them for at least six years after they are due or filed, whichever is later.  If you file electronically, you can safely keep a copy of your return without collecting unwanted paper.
  • Real estate records. These records should be kept for as long as you own the property and an additional three years after you dispose of it and report the transaction on your tax return. You should also be retaining receipts for any home improvements you make, relevant insurance claims, and documents relating to refinancing. These help prove your adjusted basis in the property, which is needed to figure the taxable gain at the time of sale of a personal residence, or to support calculations for rental property or home office deductions.
  • Stocks and bonds. To report taxable events involving stocks and bonds, retain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestments, and investment expenses, such as broker fees. You should hold on to these records for as long as you own the investments, plus the three year statute of limitations for the relevant tax returns.
  • Traditional and Roth IRAs. The IRS requires you to keep copies of Forms 8606, 5498, and 1099-R until all the money is withdrawn from your IRA accounts. It’s a good idea to hold on to all IRA records pertaining to contributions and withdrawals for Roth IRAs, in case you’re ever questioned. If an account is closed, treat IRA records the same as you would records for stocks and bonds. Be careful not to dispose of any ownership documentation until the statute of limitations expires.

Guidelines for Businesses

If you own a small business, be aware that the record retention guidelines are slightly different than for individual tax purposes. The IRS recommends keeping employee records for the three years following an employee’s termination. In addition, maintain records that support employee earnings for at least four years. This timeframe should cover various state and federal requirements. 

If you use timecards for your business and your business engages in interstate commerce and is subject to the Fair Labor Standards Act, the timecards must be kept for at least three years. However, it’s a best practice for all businesses to keep the files for several years in case questions arise.

Guidelines for specific business-related documents, include:

  • Employment tax records. Keep these for four years from the date the tax was due or the date it was paid, whichever is longer.
  • Travel and entertainment records. For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three year statute of limitations period.
  • Sales tax returns. Because regulations vary state by state, you should always check with your tax professional for the correct guidance for your state(s). For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. 

Digitizing Your Records

The IRS permits you to store tax records electronically, so long as the system you use meets IRS standards. For example, your system must provide reasonable controls to ensure its integrity, accuracy, and reliability, as well as detect and prevent tampering. In addition, a retrieval system should include an indexing system, inspection and quality assurance measures, and the capability to reproduce legible hard copies.

You can retain the documents you need by scanning the originals and storing them on an external hard drive or some other medium. There are also Web-based services that will store electronic records, virtually eliminating space constraints. 

When in Doubt, Don’t Throw it Out!

It’s easy to accumulate a mountain of paperwork from years’ worth of tax and financial records. The good news is that guidelines are available as to what you should keep and what you can discard. If you’re still unsure whether you should retain a document, don’t guess.  Hold on to the document for at least six years or, for property, at least three years after the tax return reporting its disposition is due or filed. 

If you have questions about specific tax documents and whether or not they should be saved, contact your Untracht Early professional to learn more.

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