Tax Strategies & Credits

Requirements for Maintaining Old Tax Records

Requirements for Maintaining Old Tax Records

There are very specific rules and regulations regarding the amount of time the law requires old financial records to be kept for tax purposes. Depending upon the specific circumstances, you may be able to discard your records in as short a period of time as three years following your filing, while in other instances you may need to keep them indefinitely.

It is easiest to understand how long records must be kept if you know the applicable statute of limitations. The federal government allows itself three years from the date that a return is filed or the date that the filing was due -- whichever is later --to assess additional taxes. This means that if all of your taxes were filed appropriately and correctly, you can discard old documents three years after you've filed. However, it is important to remember that the IRS provides states with information on additional tax assessments and adjustments that it has made so that the state can then act on the revised information. Because of this many states' statute of limitations for assessing additional taxes is one year longer than that of the federal government, extending the time that records should be kept by an additional year. There are, however, specific exceptions to the federal governments three-year rule, and these are applied when there are significant errors or fraud involved. The specific exceptions include: • In cases where a taxpayer underreports their gross income by more than 25 percent, the federal government doubles the amount of time that it gives itself to assess additional taxes and penalties. • In cases where a taxpayer either fails to file a return, files a return that is false or fraudulent in order to avoid having to pay tax, or takes any other action in order to avoid paying tax, the federal government is able to assess additional taxes with no limitation on time. • In cases where a taxpayer files an unsigned tax return, the federal government is able to assess additional taxes with no limitation on time. If you have filed a signed return that does not qualify for any of the exceptions shown above, it is likely safe for you to get rid of most of your financial documentation three years after you file, though it is advisable that you research the statutes for your state to determine whether it extends the federal statutes by another year. Though you can discard the documentation upon which you based your tax filing, it is important that you always retain a copy of your actual tax return and your copy of all W-2 forms received from an employer. Your return holds a great deal of important information that can be used in the preparation of your tax filings in the future. It also contains important data regarding social security benefits and property transactions that you may need. Though the rules regarding retaining data for tax purposes allow you to discard records after three or four years, there are compelling reasons to keep specific records longer. The records you should retain include: • Data regarding stock purchases. These records should be retained for a minimum of four years following sale of the stock, as you may need them to prove your profit or loss. • All statements reflecting the reinvestment of dividends. If you have applied dividends that you receive from mutual funds or stocks to the purchase of more shares of the same, you have added to your purchase basis. You will need this information in order to show a reduction in profits when you sell the stock, so retain these records for at least four years after the sale date. • Records of improvements you make on tangible property, as well as the property purchase records themselves. Whether they reflect the purchase of an investment property, a rental property, a business property or your home, retain records of capital improvements for at least four years after the sale of the property. A qualified tax professional can answer any questions you may have regarding the retention of financial records.

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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