Taxpayers are always asking “How many years do I need to maintain my tax records before I can dispose of them?”
What Tax Records Must be Maintained?
You must keep records such as receipts, cancelled checks and other documents that support an item of income, a deduction or a credit appearing on a return. They may be needed to back up everything you put on your tax return, generally until the period of limitations for that return expires.
The Statute of Limitations (SOL) Determines How Long to Maintain Tax Records
The statutes of limitations are different for assessments of different types of tax. Tax cannot be assessed after:
Three years for tax you owe. This is counted from the date you filed the return.
Any period of time if you file a fraudulent return or fail to file a return. In such cases, there is no period of limitations.
Six years from the date you filed a flawed return. This applies if you fail to report reportable income of more than 25% of the gross income shown on the return, or income attributable to foreign financial assets that is more than $5,000.
The SOL involving property makes the year of disposition more challenging. For example, if you are depreciating real estate say with a 33-year life, your support documentation for reporting the gain or loss on disposition could require you to prove to the IRS the date of acquisition, the cost of acquisition, improvements made over the life of that property, and annual depreciation claimed. Thus if you only retained those records for three years, you may have an audit issue if your return is selected for an examination. Thus, it is best to maintain those real estate property cost basis support papers until three years after the date of disposition.
When you dispose of stocks or bonds, you need to report the cost basis of the security sold to compute the taxable gain or loss. Thus if you purchased stock in year 1 and sold it 5 years later, you will need to provide the year 1 documentation to show what you paid for that stock.
Health Care Insurance
You should keep records of your health care insurance coverage and your family members. If you’re claiming the premium tax credit, you’ll need information about any advance credit payments you received through the Health Insurance Marketplace and the premiums you paid.
Business Income & Expenses
The IRS requires you to keep records so you have a backup to prove everything you put on your tax return. Insurance companies and creditors may require you to keep records longer, so you may want to verify that before you start discarding paperwork.
Claims for Refunds & Overpayments
- For filing a claim for credit or refund, the deadline to make the claim is three years from the date you filed the original return or two years from the date the tax was paid, whichever is later.
- The deadline for filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities is seven years from when the return was due.
How Must Your Tax Records Be Maintained?
As long as you can provide documentation when needed, it doesn’t matter how you keep records, but the IRS suggests you keep them in an orderly fashion and in a safe place.
If you’re in business, there’s no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. If you have employees, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later.
Tax Tip #1
Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination or if you receive an IRS notice.
Tax Tip #2
If you use an investment advisor who provides you with periodic statements, look at those statements very carefully. If you transferred securities from one advisor to another, the current advisor may not know what you paid for some of your investment holdings. The advisor’s statements will show that there is no unrealized gain or loss being reported. You want to begin to document what your tax basis is for that security now and not wait until the security is sold. Due to company mergers and reorganizations, pay out of dividends that get reinvested in your account rather than being distributed to you, stock splits, etc., it is much easier to determine tax basis early in the process rather than over a several year span.
Tax Tip #3
Consider backing up your tax records in an electronic format. Hard disks crash and files can inadvertently be deleted. Accordingly, keep at least one copy of your tax records off-site, such as in a safe deposit box.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.