Guideline For Retaining Tax Documents

Now that the 2018 tax deadlines have passed, it is a good time to think about what to do with the tax documents associated with 2017 tax returns. In general, it is recommended that receipts and statements that could be used to substantiate items reported on a tax return be kept until the statute of limitations for that return expires. However, the length of this statue may vary according to the particular circumstances associated with the return. In addition, documents pertaining to such things as property and securities should be kept beyond the statute of limitations. Since the IRS and the United States Tax Court operate under the assumption that a taxpayer is guilty of tax fraud if they are unable to provide proof of the items claimed on a tax return, it is crucial to know and understand the guidelines associated with retaining tax documents.

In general, the IRS will only audit a tax return within three years from the deadline for submitting the return or from the date the return is actually submitted, whichever comes later. However, this limitation period may be extended to six years if the return incudes foreign asset income that exceeds $5000 or a deduction for a bad debt or a worthless security. It may also be extended to the six year mark in the case where gross income is underreported by more than 25%. The audit limit for an intentionally fraudulent tax return is indefinite. Based on these time constraints, tax documents should be kept for a minimum of three years to seven years from the time a tax return is submitted, depending on the nature of the return.

The following are some more specific guidelines pertaining to the length of time various documents should be retained for tax purposes:  

·        Tax Returns and Supporting Documentation

Tax returns and all associated tax information should be kept for a minimum of seven years in order to exceed the statute of limitations period for an IRS audit. Supporting documentation includes W-2s and 1099s as well as checks and payment records that are necessary to support any credits or deductions claimed on the returns.

·        Bank and Credit Card Statements

Since bank and credit card statements are not considered to be sufficient documentation for items reported to the IRS, they do not need to be held for any specified time period.  

·        Employment Tax Records

Employment tax records should be kept for a minimum of four years from the date the tax is due or the date it is paid, whichever comes later.

·        Records Related to Property Transactions

Property tax records should be retained until the expiration of the IRS statute of limitations for the tax year in which a property is sold or disposed of by some other means. Such records are needed to calculate depletion, amortization and depreciation for tax purposes and to determine the net capital gain or loss that has resulted from owning the property. It should be noted that, in the case of a nontaxable property exchange, it is necessary to hold the records of the old property as well as the one acquired in the exchange.

·        Brokerage Statements

Brokerage statements should be kept indefinitely due to the fact that the cost basis of a security must be reported at the time of sale. This requires brokerage statements documenting the security’s complete transaction history.

·        IRA Records

IRA transaction records, including those for Roth IRAs, should be kept until all funds are withdrawn from the account and the account is closed.

·        Business Contracts

All business contracts, including partnership agreements, property records and commission and royalty structures, among other things, should be kept indefinitely.

It should be noted that documents that are no longer needed to substantiate items reported on tax returns may be needed for other purposes. Various entities such as lenders, other creditors and insurance companies have their own time and documentation requirements that may differ from those of the IRS.                 

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