Newsletter – March 2017

 Tax Record Retention

The most frequent tax question I get asked is: How long do I need to retain my tax records? The answer I give is it depends on the type of tax records that you have but there are some general rules of thumb that most taxpayer’s should adhere to.

Three Year Rule

Most taxpayers should retain their tax records for a minimum of three years. The reason for this is because the Internal Revenue Service has a three year statute of limitations in which they can go back and audit your tax return. This statute of limitation starts from the later of the due date of your tax return or when you filed your tax return. For example, let’s say the due date of your tax return is April 15th, 2017 and you filed your tax return on March 20th, 2017 then the IRS can at any time between April 15th, 2017 and April 15th, 2020 audit your 2016 individual income tax return because the due date would be later than your filing date. So for the 2016 tax year you would retain all of your tax records up through April 15th, 2020. This particular rule would cover the majority of taxpayers. However, there are exceptions to this rule.

Sales of Capital Assets

If you sell capital assets (stocks, bonds, mutual funds, real estate) and report those sales on your tax return you may want retain those records for up to six years because on some sales you can go back and amend your tax return for up to six years if you reported an incorrect basis on your originally filed tax return. Also anytime you acquire capital assets for a given year you should hold onto those acquisition records until the asset is eventually sold and then another six years after the tax return is filed. In addition, when it comes to real estate that is held for many years and there have many repairs and improvements over the years you should retain all of those improvement records until the property is sold and then another six years after the due date of the tax return.

No Limit Retention

There are circumstances where you would want to retain your tax records indefinitely. Some of these circumstances would include a tax issue where there may be an issue where there is not a lot of definitive tax guidance and there could be some question as to the validity of what is being reported on the tax return. This could be a situation in which if the IRS believes there may be fraud or criminal intent then there would be no statute of limitations and then the IRS could go back forever to audit the taxpayer. For most taxpayers this would be extremely rare but it does happen, mostly to higher income taxpayers who have tax shelters or have other issues that may be questionable.

 Happy Shredding

Once you are ready to get rid of your records your best option to purge your records is to shred them. However, I would suggest that if you do have a complex tax return and have some questionable tax issues you may want scan those records and keep those in a digital format and then shred the originals. You would do this after the three year statute has expired.