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How long should you keep records?


Individual taxpayers and business owners must deal with an enormous amount of record keeping. Data arrives regularly, electronically and on paper. Keeping track can be a challenge.

Just as challenging, you must decide which records to keep and how long. If you just keep everything, you will have increased storage responsibilities and a more difficult time locating the information you need. Moreover, the longer you retain records, the greater the chance that someone might access them and use them improperly.

So how long should you keep records? The short answer is it depends. Some records can be destroyed after a short time, but others must be kept indefinitely, depending on the nature of the transactions they describe.

Timetable for tax records

Generally, you must keep tax records that support the income, deductible expenses, and credits you report on a tax return. In addition, you should keep copies of the returns you file. The basic rule is you should keep these records until the limitation period runs out for the return the record is related to. The limitation period is the period in which you can amend a return to claim a credit or refund, or the IRS can assess additional tax.

Generally, the limitation period for a return is three years after you file the return. If you file your return before its due date, it is treated as filed on the due date for these purposes. Thus, as of this writing, you can shred and erase most tax records for 2008 and earlier years (however, if you filed on extension for 2008, the limitation period may not be up yet, depending on when you filed). Your tax records for 2009 and 2010 should be retained because the limitation period for those returns has not run out.

Exceptions exist:

* If you mistakenly did not report income that you should have, and the shortfall is more than 25% of the gross income shown on your return, you should keep records for six years, rather than three years.

* If you filed an amended return to claim a credit or a refund, you should keep records for (a) three years from the date you filed your original return or (b) two years from the date you paid the tax, whichever is later.

* After you have filed a claim for a loss from worthless securities or a bad debt deduction, keep the relevant records for seven years.

* If you have employees, you also should keep all employment tax records for at least four years after the date the tax became due or has been paid, whichever is later.

Caution; If you did not file a tax return--or, even worse, filed a fraudulent return--the limitation period never runs out. Keep tax records for those years indefinitely.

Beyond the limit

Even if you haven't amended a tax return, you may have to hold onto some records for an extended time period. That's true of records connected to assets such as securities or real estate. Until you dispose of such assets in a taxable transaction, you should keep records that support your claimed gain or loss as well as any depreciation, amortization, or depletion deductions you've taken. If you have received property in a taxfree exchange, you should keep the records that relate to the property you relinquished and to the property you acquired until the limitation period expires for the year in which the new property is sold in a taxable disposal.

In addition, you should keep records of nondeductible contributions to retirement accounts indefinitely. Those contributions will allow you to avoid some tax on future withdrawals and on Roth IRA conversions. You also should retain home-improvement records as long as you own a house because those outlays could reduce the tax you'll owe when you sell.

Filing for the future

The IRS permits businesses, sole proprietors, and individual taxpayers to store tax documents electronically. Besides documents that originate electronically, the IRS rules also permit taxpayers to convert paper documents to electronic images and maintain only the electronic files. This allows for the paper documents to be destroyed.

For businesses, the IRS electronic record retention rules require electronic files to provide enough information to justify entries made on tax returns, so the tax liability can be determined. Those records must be detailed enough to explain transactions and identify any underlying source documents. Companies must make electronic records available to the IRS upon request and provide the IRS with any help needed to access the information contained in those records.

If your company uses an electronic storage system for its records, you should be sure that the system can index, store, preserve, retrieve, and reproduce the electronic data. Make sure the system provides reasonable controls for the integrity, accuracy, and reliability of your data. For your own security, you'll want a system that's designed to prevent and detect any unauthorized revision or deletion of your data.

Beyond taxes, other vital business documents must be retained for extended time periods. The requirements usually are set by state law. However, legal documents such as contracts, leases, and binding agreements probably should be retained in hard copy document form.
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Publication:CPA Client Bulletin
Geographic Code:1USA
Date:Aug 1, 2012
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