Has the Spring Cleaning Bug Bit You? Can You Toss Those Tax Records?

Now that tax season is over are you itching to clean out your office and garage and get rid of boxes of old tax returns? Do you know which records you can toss and what to save?

I am regularly asked, “How long should I hold on to my tax records?”

While there are few hard and fast rules, here are some guidelines we urge all our clients to keep in mind as they organize their records.

For individuals

You should retain any records that support items shown on your individual tax return until the statute of limitations runs out, which in most cases is three years from the date you filed your return.

However, in some cases, the statute of limitations is longer. If you understated your adjusted gross income by more than 25 percent, for example, the limitations period is six years. The statute of limitations does not begin until you file a tax return. It may wise to keep your records for the full six years so you can defend against any charges of gross understatements. It would be hard to defend against this allegation if you don’t have the records to substantiate. I tend to recommend keeping your records for seven years, just to be safe.

You can also file an amended return on Form 1040X during the general three-year statute of limitations period if you missed a deduction, overlooked a credit or misreported income.

  • Real estate records. Keep these records for as long as you own the property, plus three years after you dispose of it and the transaction is reported on your tax return. Retain receipts for home improvements, relevant insurance claims, and any refinancing documents. This help to prove your adjusted basis in the property, which is needed to determine the taxable gain at the time of sale of a personal residence, or to support calculations for rental property or home office deductions, should you be claiming those on a return.
  • Traditional and Roth IRAs. The IRS requires you to maintain records of your basis in your IRA accounts until all the money is withdrawn from your IRA accounts. In most cases, that basis is tracked on Form 8606. For Roth IRAs, hold on to all records pertaining to contributions and withdrawals. If an account is closed, treat IRA records the same as records for stocks and bonds. Don’t dispose of any ownership documentation until the statute of limitations expires.
  • Stocks and bonds. To report taxable events involving stocks and bonds, retain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestments and investment expenses, such as broker fees. You should hold on to these records for as long as you own the investments, plus the three-year statute of limitations for the relevant tax returns.

For businesses

If you own a small business, record retention procedures will look a little different. The IRS recommends keeping employee records for three years after an employee has been terminated. In addition, maintain records that support employee earnings for at least four years.

  • Timecards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it’s a best practice for all businesses, regardless of geography, to keep the files for several years.

These are our more specific recommendations:

  • Employment tax records. Keep for four years from the date the tax was due or the date it was paid, whichever is longer.
  • Travel and entertainment records. For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the statute of limitations period.
  • Sales tax returns. Because regulations vary by state, please check with a tax professional for the most accurate and up-to-date information. For example, the statute of limitations in Florida is generally 10 years.

When in doubt, keep it

It’s easy to accumulate a mountain of paperwork from years’ worth of tax and financial records (though you may consider securely digitizing your records to save space). If you are unsure whether you should retain a document, a good rule of thumb is to hold on to it for at least seven years or, for property, at least three years after the tax return reporting its disposition is filed.