As many of us attempt to simply our lives and clear the clutter, the question I am often asked by my clients is what tax records they are required to keep and for how long.
There are 4 different periods of limitation that apply to individuals and businesses. Normally the IRS requires us to keep copies of tax returns for 3 years. However, if gross income is under reported, the return must be kept for 6 years. If there is a claim for loss from a worthless security, the return must be kept for 7 years. If any information on the return is falsified, the return must be kept indefinitely. These periods of limitation coincide with the IRS’ period of limitation to audit a tax return. For example, the IRS can normally only audit the last 3 years; however, if the IRS finds that information has been falsified or omitted, there is no period of limitation.
Business tax filers also have additional limitation periods for specific types of records, one is payroll records which must be kept a minimum of 4 years from the date all taxes were paid. There may also be periods of limitations imposed on the business by other agencies who returns are filed with.
In addition to copies of our returns, the IRS requires individuals to have written evidence of all the amounts shown on the tax return. This means proof of all income and deductions. Proofs of income include W-2s, 1099s, bank statements, brokerage statements, K-1s and cash receipts. Proofs of deductions include canceled checks, bank statements, receipts for cash expenses, and credit card receipts/statements. However, there are instances when additional records may be required such as when a home sale is reported, stocks are sold, alimony is claimed, child care credit is taken, or business use of home is deducted.
Business tax filers must also have written evidence of all amounts shown on the tax return; however, there are many instances when specific information/documentation is required. A few examples are receipts for business meals and entertainment which must also show business purpose and names of the attendees and asset records including all receipts for capital improvements and depreciation calculations.
Remember, the above are the minimum times we are required to keep our records -keep them longer if you prefer. ( I myself, have every tax return I have ever filed!)
This information is just a general overview of record retention. I encourage readers to contact their tax professional or visit www.irs.gov and download publication 552, “Recordkeeping for Individuals” and publication 583, “Starting a Business and Keeping Records” to help determine what requirements apply to their particular situation.