Tax Record Retention
Retaining and storing your income tax records is an important final step of your tax filing responsibility. We would like to remind you of the rules for keeping your tax records along with some information on storage options.
When determining how long to keep most of your income tax records, we look at the time frame over which the IRS can audit a return and assess a tax deficiency or that you can file an amended return. For most taxpayers, this period is three years from the original due date of the return or the date the return is filed, if later. For example, if you file your 2009 Form 1040 on or before April 15, 2010, the IRS has until April 15, 2013 to audit the return and assess a deficiency. However, if a return includes a substantial understatement of income, which is defined as omitting income exceeding 25% of the amount reported on the return, the statute of limitations period is extended to six years.
A good rule of thumb for keeping tax records is to add a year to the IRS statute of limitations period. Using this approach, you should keep your income tax records for a minimum of four years (five years for California returns). To be more prudent, the IRS informally recommends you retain your tax records for seven years and we agree.
Certain tax records should be kept much longer however and others indefinitely. Records substantiating the cost basis of property that could eventually be sold, such as investment property and business fixed assets should be retained based on the record retention period for the year in which the property is sold. Other documents such as tax returns, IRS and state audit reports, and business ledgers and financial statements are examples of the types of records you should retain indefinitely. Other important papers such as estate and gift tax returns, divorce and property settlement agreements, deeds, title insurance policies, and all trust documents should also be kept indefinitely in a permanent file or perhaps a safe deposit box.
Keep in mind that there may be non-tax reasons to keep certain tax records beyond the time needed for tax purposes. This might include documents such as insurance policies, leases, real estate closing statements, employment records, and other legal documents. Your attorney can provide additional guidance on how long you should keep these types of records.
It is also important to know that the IRS permits taxpayers to store certain tax documents electronically. Although the rules are aimed primarily at businesses and sole proprietors, they presumably apply to other individuals as well. The rules permit taxpayers to convert paper documents to electronic images and maintain only the electronic files. The paper documents can then be destroyed. Certain requirements must be met to take advantage of an electronic storage system, so contact us if you want more details.
Please note that LMGW retains copies of tax returns, financial statements and essential work papers for seven years after preparation. As a general rule, we do not keep any original client records. Instead, we return your records to you at the completion of our work. When records are returned to you, it is your responsibility to retain and protect your records for possible future use, including potential examination by any government or regulatory agencies.
LMGW has also instituted a disaster recovery plan that includes safeguarding of records related to the work we perform. However, no disaster recovery plan, no matter how thorough, can provide absolute assurance that catastrophic or other unforeseeable events will not occur that result in the premature deterioration of records or that render records unavailable before the expiration of the above retention period.
We hope this brief overview helps you understand the income tax record retention rules. If you are not sure, please call us before you throw it out!
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