How Long Should Tax Records be Kept?
Spring Cleaning Can Include Important Documents Too
Feb 19, 2009
The final task after submitting a tax return either electronically or by paper copy is to make a copy for safekeeping. Items can be lost in the mail, or errors in internet transactions can result in the need to refile.
The copies should then be placed in safekeeping. The U.S. Internal Revenue Service offers guidelines on how long the records should be kept, in case of audit, or the need to amend the return.
How Long Should Tax Returns be Kept?
Per the IRS, tax returns and supporting documentation should be kept a minimum of three years. There are specific situations where they are required to be maintained longer.
- You owe additional tax and situations (2), (3), and (4), below do not apply to you; keep records for 3 years.
- You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
- You file a fraudulent return, or do not file a return; keep records indefinitely.
- You file a claim for credit or refund after you file your return; 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.
- You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
Supporting Documentation with Returns
Documents that substantiate items on the return may need to be kept longer than the minimums above. The key is whether the item is referenced on multiple years’ returns.
A common example is property held for investment. Documentation related to the asset should be maintained as long the asset is held, and then an additional three years.
Documentation includes purchase documents, improvements, depreciation schedules, and other items that impact the tax situation of the investment.
Why? In order to determine the gain or loss on disposition of the investment, it is necessary to substantiate the purchase price, cost of major additions or deletions, and undepreciated value.
If a property that was purchased for $20,000 is sold for $40,000, the taxable income is $20,000. If documentation can verify that there was a capital improvement for $10,000 made in between, the taxable gain would be only $10,000.
Keeping Electronic Returns
The required number of years does not change whether the returns and documentation are paper or electronic. For an audit or amended return, electronic information will probably have to be converted to paper.
Things to be careful about:
- If the returns are filed on specific software programs (Turbotax, TaxCut) you will need to maintain copies of the files and the programs. It will not be the IRS’ responsibility to provide the disks to recover the information.
- If the files are maintained on a computer hard drive, make a backup copy and store it safely, ideally in a fire-proof safe.
- When purchasing a new computer, make sure the files and software are transferred to the new machine.
Once the period of limitations has expired, it is safe to destroy the returns and support. Paper should be shredded since it contains important personal identification information. Never donate or sell personal computers with tax information unless the drives have been completely erased.
