Record Retention Guidelines for Tax Returns
One of the more common questions we’re asked is regarding records retention. How long should I hold on to this stuff? The answer, as just about any we’re asked in the tax world, is- it depends. The basic rule of thumb is that for any tax return that is filed, there is a statute of limitation of 3 years. That is the length of time IRS has to review a return and can require you to produce documentation of any expenses claimed. The IRS also has a 6 year statute for substantial misstatement, and no statute on unfiled or fraudulent returns, but the 3 year rule will apply to almost all taxpayers.
However, the 3 year rule begins from the date a return is filed. For instance, your 2012 return was filed in many cases by April 15, 2013. So the statute starts ticking on that date, and expires on April 15, 2016. A quick glance shows 4 years between 2012 and 2016, so that confuses a lot of taxpayers. To allow for this, and the possibility that returns may have been filed late or under extension, we tell clients as a general rule to hold on to documents for 5 years.
But not every transaction you encounter is related to a single tax year. Stocks may be held for years, and purchased over years (especially using DRIP plans). Houses, both residences and rental/investment property, likewise are held over a number of years. Transactions related to real property are particularly interesting because they can be divided into two categories- ordinary and necessary operating costs that are limited to specific years; and holding/carrying costs that are capitalized to the basis and need to be tracked until the property is old. For any assets that are held long term, supporting documentation should be maintained for 5 years AFTER disposition of the asset. So, in some cases, you may have records that go back 30 or more years.
IRS accepts electronics records. As data storage and scanners become more inexpensive, electronic storage is a perfectly acceptable replacement for an attic full of paper files. Our policy is it’s better to have too much documentation than not enough. We have seen client audits where an auditor questions a transaction or two. Once they see proper documentation and proper adherence to rules, they will not look as far. If they look at a couple of transactions and proper documentation cannot be provided, additional transactions can be scrutinized, and even other years can be opened up for inspection.
Below is a quick listing of time frames for different items:
- Tax returns (business or personal) – 5 years from the tax year being filed.
- If no return is filed the statute doesn’t start, and records must be maintained indefinitely.
- If the return includes a claim for bad debt or worthless stock, maintain for 7 years.
- Long held assets- 5 years after disposition. This includes stock purchases, improvements to real property, carrying costs, and depreciation/amortization schedules.
- If the property was acquired as part of a tax free exchange, you must also keep the records of the old property for 5 years after the new asset is disposed of.
- Inherited property- You generally receive a step up in basis as of the date of inheritance. For readily marketable securities (public stocks), an average price listing on the date of death is sufficient to establish this price. For real estate or other non-marketable assets, diligence should be taken to document a fair market value as soon as possible, through an Estate Tax return if filed, an appraisal, comparable sales, etc. This documentation should be retained until 5 years after asset disposition.
The IRS has some handy links on records retention:
What kind of records should be kept. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What-kind-of-records-should-I-keep
More detail on how long records should be kept. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records