Records retention: what you need to know

Before you throw away those old financial and tax records, are you sure you should?

You’re looking at boxes stuffed with files, and on the outside of the box is written, “tax records.” The question in your mind is this: Can you throw them away? Maybe. But perhaps not. Is it legal? Even if it is, you know that if you toss them today you’re going to want tomorrow to look in that box at something you haven’t thought about in 10 years.

Seven years is typically believed to be the answer to the question of how long records must be kept. But that’s not true. The nature of the document determines the length of time you’re required to keep it in your possession. The IRS has guidance on records retention. Most of its serious and helpful, but in some places it’s unintentionally humorous. For example, one suggestion is to “Keep records indefinitely if you file a fraudulent return.” Safety tip: don’t lie to the IRS. Asking someone to be honest about the lie they told on their return seems unusual. But there are reasons. If the IRS uncovers the fraud, having the correct records to arrive at the actual amount of tax could be important in terms of what happens next to that person. 

Now to the issue of records retention.

One suggestion that as accountants we find valuable is that you always keep your tax returns. Quite often it’s useful to refer to past tax returns – sometimes well in the past – to chart various aspects of income progress, trends, history, and other subjects, and if amendments or other action are necessary. Sometimes the more complex the subject and the need for review, the greater the value of tax returns that can date back a decade or more. So, for safety’s sake, it’s best to put copies of your return somewhere safe and hold on to them.

The IRS says that the “action, expense, or event the document records” dictates the length of time the documents must be retained. Aside from indefinitely keeping your records if you committed fraud with your return, here is other IRS guidance, or “periods of limitation,” that apply to tax returns, generally going into effect the year after the return is filed (records should be kept for three years if No. 3-5 below don’t apply in your case): 

  1. “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, if you file a claim for credit or refund after you file your return.
  2. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  3. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  4. Keep records indefinitely if you do not file a return.
  5. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.”

Having the proper records, if you need them, is a self-protection measure, a good thing to keep in mind before you head to the dumpster with that box.

 

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