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Keeping Tax Records

By: Chuck Strauss

June 14, 2013

How long are you supposed to keep your income tax records—your tax returns and all the supporting documents for deductions, credits, expenses, and other categories like employment records? The benefit of knowing how long you need to hold onto these documents is that it will help you keep the size of your stack of tax records under control because you will know which documents you can safely discard. The problem is that the information about these holding periods lies buried in various statutes, making it a little difficult to find. While many businesses can now easily digitize their important documents and keep them indefinitely, individual taxpayers may not have this option, even in this age of advanced computer technology. Whether you choose to scan and store your documents electronically, or you keep paper copies, here are the guidelines for keeping tax records.

Federal Tax Records

With respect to federal income tax returns, keeping five years' worth of supporting records is more than adequate for most taxpayers. Assessment of federal income tax by the IRS must generally occur within three years of the later of the date that the return was actually filed or the regular due date of the return. This assessment period, combined with the portion of the year that the taxpayer held the document prior to the date the return was filed, would equal no more than five years in most cases, even when a possible extension is included. If an extension is included at any point, a “five year rule” might not be sufficient.

A practical and convenient approach is to have a general rule that is easy to remember and easy to follow. So the general rule is, discard every document five years after it was issued. Some problems can come up with regard to certain kinds of documentation—for example, evidence supporting the tax basis of property should be retained until the statute of limitations has run out on the return that reported the sale of that property.

A broad statement is to “Keep all records for as long as you might need them.”  That is, in order for you to support the information reported on your tax return, the records and/or documents must be available.  Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept at least until the statute of limitations expires for that return. In most cases, this means that records should be maintained until after the expiration of the statute of limitations for a particular tax year.  The federal statute of limitation is three years from the date the tax return is filed or two years from the date the tax is paid, whichever date is later.

So, will you be safe from an audit after three years? Not necessarily.  There are exceptions if the IRS has reason to believe your income was understated by 25 percent or more, if that happens, the statute of limitations for an audit increases to six years. Likewise, if there is suspicion of fraud or you don’t file a tax return at all, there is no “statute of limitation” for the IRS.

There is no “easy” answer that covers all possibilities.  Experts suggest certain minimums which are typically longer that the IRS and some States’ requirements.  Records of stock transactions, retirement plan distributions, charitable contributions, childcare expenses, partnership K-1s, and similar materials must typically be kept for as long as taxpayers might need to produce them to support tax return disclosures.

Helpful Resources--Federal Taxes

This Service Corps of Retired Executives (SCORE) website has an excellent article which includes lists of documents to keep and suggested periods to keep them.

The IRS Publication 552   is a good resource about records, record keeping and what kinds of proofs may be needed in the event the IRS wants to closely analyze your tax returns. There is a concise summary of requirements, and links to other publications in the IRS’ Topic 305  .

State Income Tax Returns

Unfortunately, the above “rule “cannot take into account all income tax–related reasons for maintaining records. Most states have an income tax, and many states have statutes of limitations that differ significantly from the federal statute. The end of the limitations period for state income tax purposes can vary by as much as two years from the end of the period for federal income tax purposes. A summary of holding periods for various jurisdictions may not be easily attainable.

Probably the best advice is to log in to your state’s Revenue Service website and look for specific answers—such as, for example, the Commonwealth of Virginia site which has specific information about record keeping.

One very good reason to have your taxes prepared at your local PRO-TAX office is that at least you will always know where to get a copy of your tax return.