Income tax record retention is a topic that often causes confusion and frustration. A variety of documents are needed to be retained for both tax and other purposes. Knowing how long you need to keep documents should help you organize your records for easy retrieval and destruction. This article outlines federal income tax record retention suggestions to help you navigate your own tax record retention.
What records does the IRS recommend taxpayers maintain?
The IRS requires that all taxpayers keep books and records to support items reported on a taxpayer’s return. For both individual as well as business taxpayers this includes, but is not limited to, support for all items of income, deduction, credit, payments, business or investment purchases, asset acquisitions or retirements, etc.
How long should I retain my tax related records?
The minimum retention period for tax records is until the expiration of the statute of limitations, including extensions, for each tax return. The statute of limitations is the time period in which one can amend a tax return to claim a credit or refund, or the IRS can assess additional tax. This is generally 3 years after the filing of a return. The IRS statute of limitations is 6 years if there is a substantial understatement of gross income. Most advisors add a year to this timeframe and suggest that all income tax records be kept for a minimum of 7 years.
Many states stipulate longer statute of limitations periods, typically 4 years. Note that in certain situations, books and records should be kept longer, as shown in the lists below “Business Records Retention”.
Should I keep copies of my tax returns?
The IRS recommends that taxpayers keep a copy of tax returns filed indefinitely. This includes all forms and attachments. Previous returns are useful in preparing future tax returns. Also, previous returns and related support schedules are useful for computations if taxpayers later file an amended return.
What are some commonly recommended periods for tax related record retention?
We have grouped items for retention by retention period below. Note that the retention period for tax returns is from the date the tax return was filed or the date that it was due, whichever is later. Also, the retention period related to assets begins when the tax return for the year of sale or disposition of that asset is reported.
What are some examples of tax related records? and their retention periods?
Typically, the record retention period for records and documents used to support your tax return starts when the records and documents no longer have relevance. This might be when an asset is sold, or a deduction is taken on a tax return. So, for a business building, the cost records are no longer relevant when the building is sold. However, if the sale is made through a like-kind exchange, the basis of the building sold carries over to the next building. Therefore, that document in your file for the addition of a wall in the old building still has relevance to the cost basis of the new building. In this situation, the documents for the old building should be added to the documents retained concerning the new building. As a result of this type of transaction, the sale of the old building is effectively ignored for document retention purposes.
Now assume that there is a possibility that there was environmental damage to the land beneath the old building. All documents related to the potential environmental damage should be placed in the permanent retention category due to the nature of litigation related to environmental damage.
Does it matter if the records are electronic?
Record retention guidelines are essentially the same whether the records are in electronic form or paper form.
Record retention for tax and business documents is very important but can be a headache to keep straight. The record retention schedules listed above are far from a complete list. However, these guidelines should provide a good idea as to the types of records and documents that fall within the various record retention periods. The key is to remember that the record retention period starts when the record or document no longer has relevance.
People often ask how long they should keep records and documents for various purposes and our team can help you make the correct determination. Fill out the contact information form and we will answer your concerns.
Meet the Author
Michael specializes in meeting the tax compliance, projection, and planning needs of businesses, entrepreneurs, and business owners. He is Tax Partner in PW Associates, a firm that provides CFO and outsourced tax and accounting services. Michael has regional and small CPA firm experience and ran a sole practitioner tax practice for over 25 years.
This communication is provided by PW Associates, PLLC for educational and informational purposes only and is not intended, nor should it be construed as tax or legal advice. The comments in this communication are based on our understanding of applicable rules and regulations as of June 16, 2020.
Any commentary interpreted as tax advice in this communication (including attachments and/or links) is not intended to be used, and cannot be used, for the purpose of avoiding penalties imposed on the taxpayer by any governmental taxing authority or agency. In addition, if any such commentary or advice is made available to any person or party other than the party to whom the advice was originally directed, then such commentary or advice, under IRS Circular 230, is to be considered as being delivered to support the promotion or marketing (by a person other than PW Associates, PLLC) of the transaction or matter discussed or referenced. Thus, each taxpayer should seek specific tax advice based on the taxpayer’s particular circumstances from an independent tax advisor.