Over the years, tax and other paper records tend to mount. Many individuals and companies keep records longer than necessary in case the IRS, state tax authorities, or another regulatory body inquires about a course of action. The following record retention guidelines can prevent your home or office from looking like a TV show about hoarding.
E-filing is on the upswing. According to the Data Book released by the IRS on March 24, the agency collected almost $3.1 trillion in federal revenue and processed almost 240 million returns during fiscal year 2014. About 65 percent of all returns were filed electronically. The 147 million individual income tax returns filed, 84 percent were e-filed.
Business Record Guidelines
You might think those numbers suggest we are close to becoming a paperless society, at least when it comes to the IRS. That would be a wrong assumption. Even if you recently filed your 2014 tax return electronically, you probably printed out a hard copy. Add that paper to the financial reports, bank statements, receipts and other documents you may have been holding onto for years and your filing cabinet and closets are overflowing with paper. Once you file your tax return, take time to do some spring cleaning. However, your old tax records should not be discarded without thinking about the process. Some documents may still be needed in case the IRS ever comes calling.
IRS Audits and Amended Returns
Generally, keep records supporting items claimed on your individual tax return until the statute of limitations runs out. Typically, three years from the due date of the return or the date you filed, whichever is later. This year, for example, you can toss tax records for 2011 (return filed in 2012) and paperwork from that year and earlier years. Files should be kept for the past three tax years. The IRS can audit returns for a minimum of three years after filing. IRS Form 1040X can be filed during this time period for a missed deduction, overlooked credit, or misreported income.
You are not necessarily safe from an audit after three years. Key exceptions to this general rule include:
- The statute of limitations increases to six years if the IRS has reason to believe you understated your income by 25 percent or more, and
- There is no time limit if the IRS suspects fraud or you do not file a tax return.
Various Retention Requirements
Keeping records for three years is the general rule. There are exceptions for certain records. In some cases, there is no easy answer to the question of how long you should keep specific papers. The IRS does not require you to keep records in any particular way. Basic guidelines for individuals are:
Completed tax returns. Some tax advisers recommend keeping filed returns for a lifetime to prove to the IRS that you actually filed. Even if returns are not kept indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.
Backup records. Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices, and sales records, should be kept for at least three years.
Exceptions. There are times when you may be entitled to more than the usual three years to file an amended return. For instance, you have up to seven years to take deductions for bad debts or worthless securities, so do not toss records supporting refund claims.
Real estate records. Keep real estate records for as long as you own the property, plus three years after you sell and report the transaction on your tax return. Throughout ownership of the property, keep records of the purchase, as well as receipts for home improvements, insurance claims, and documents relating to refinancing. These may prove your adjusted basis in the home, which is needed to calculate the taxable gain at the time of sale, or support calculations for rental property or home office deductions.
Securities. To accurately report taxable events involving stocks and bonds, you should maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment, and investment expenses, such as broker fees. Keep these records for as long as you own investments, plus the statute of limitations on the relevant tax returns.
Individual Retirement Accounts (IRAs). The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRA accounts. Now that Roth IRAs have been added into the mix for some retirement savers, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned. If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.
Issues affecting more than one year. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards or casualty losses, should be saved until the deductions no longer have an effect, plus seven years, according to IRS instructions.
These general recordkeeping guidelines are for individual tax purposes. Businesses, insurance companies, and creditors may have other requirements. For further guidance, you need to contact your advisers.
One last word: Shred. When cleaning out financial information — it is extremely important you shred everything.