Hey Vance, How Long Should I Keep My Tax Records?

Regularly, I am asked how long one should keep tax records.  This is an important and straight-forward question. My usual answer is less direct: “it depends.” As you can see below, that’s a pretty good answer. Except for my comments in italics, the following advice is from the IRS website and IRS Newswire IR-2016-162. Click here to read from the IRS website. Henceforth, I will forward a copy of this blog to inquisitors.

How long should I keep records?

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns, unless otherwise indicated. Other types of taxes may have other periods of limitations. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.  Keep these copies forever.

Period of Limitations that apply to income tax returns

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.

This is a rather interesting and awkward way to address the fraud issue. A bit more explanation is in order. The period of limitations for assessing taxes does not run for false or fraudulent returns with the intent to evade tax. There is, however, a six year period of limitations for filing criminal tax evasion charges. The government has the burden of proof to prove fraud and the hurdle is high for the government.  Nevertheless, if you are “skating on one night’s ice,” you should consider retaining your records forever, if they will help exonerate you.  Note:  If you have to worry about this, I doubt that you are my client or ever will be.  I’ll refer you to a good tax controversy attorney.   

7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Bottom line for me: Keep all your records for at least six years after you file a tax return or the original due date, whichever is longer.  While 25% of gross income seems like a big change, I’ve seen increases or alleged increases of that magnitude arise with surprising frequency.

Note that state periods of limitations may differ from the Federal periods.

Healthcare information statements should be kept with other tax records. Taxpayers do not need to send these forms to IRS as proof of health coverage. The records taxpayers should keep include records of any employer-provided coverage, premiums paid, advance payments of the premium tax credit received and type of coverage. Taxpayers should keep these – as they do other tax records – generally for three years after they file their tax returns.

Whether stored on paper or kept electronically, the IRS urges taxpayers to keep tax records safe and secure, especially any documents bearing Social Security numbers. The IRS also suggests scanning paper tax and financial records into a format that can be encrypted and stored securely on a flash drive, CD or DVD with photos or videos of valuables.

Note that you can store your records electronically and not keep reams of paper documentation.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should I do with my records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

Last word: The ability to securely and inexpensively electronically store tax records takes away most of the reasons to worry about destroying your tax records.  Keep them forever!

VKM

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