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03.24.21

How long a taxpayer should retain tax records

BY Christopher F. Caldwell, EA

The length of time a document must be retained depends on the action, expense, or event that the document records. While we recommend you keep copies of your tax returns forever, the IRS says that records that support items of income or deductions on a tax return need only be retained until the statute of limitations runs out.

Statute of limitations

The statute of limitations is the period of time in which a tax return can be amended to claim a credit or refund, or that the IRS can assess additional tax. For most taxpayers, that means keeping records for three years following the date of filing or the due date of the return, whichever is later.

For example, if you file your 2020 return on April 15, 2021, you’ll want to keep the records supporting them until April 15, 2025.

However, if you omit 25% or more of the gross income shown on your return, the statute of limitations is extended to six years, and if you file a fraudulent return or if you don’t file a return at all, the statute of limitations never runs out, so you’ll want to hold onto your records forever.

Beyond the statute of limitations

Under certain circumstances, you should keep your records even longer than three years:

  1. If you have an asset for which you are claiming depreciation, you’ll want to keep records pertaining to that asset for as long as you own the asset plus three years. These records include deeds, titles, and cost basis.
  1. If you have property that will result in a taxable event at the time of sale or disposition, such as stocks, bonds, or your home, you’ll want to keep records that support your related tax consequences, (capital gains, capital losses, etc.) until the disposition of that property plus three years.
  1. If you claim special deductions and credits (for example, if you file a claim for a loss from worthless securities or a bad debt deduction), you’ll want to keep your records for seven years.
  1. If you have employees, including household employees, keep employment tax records for at least four years after the date that payroll taxes became due or are paid, whichever is later. This includes Forms W-2 and W-4, as well as related pay and benefit information.
  1. If you receive property as the result of a gift or inheritance, you’ll want to keep records that support your basis in that property. Generally, if you inherit property, your basis is the stepped up value as of the date of death; if you receive a gift, your basis is the same as the donor’s basis. Don’t toss those old records just because you’re the new owner of the asset.
  1. If you contribute to an IRA or other qualified plan, you’ll want to keep Forms 8606, 1099-R, and 5498 until all distributions have been made.

Tax records may be needed for another reason

Even though records are no longer needed for tax reasons, they may be needed for other reasons.

For example, insurance companies and creditors often require records be maintained for a period beyond what the IRS requires. If you are still unsure of what records to keep, please contact your tax advisor for assistance.

Shred your tax records

Also, remember to shred anything containing personal information, such as your social security number, birthdate, credit card number, etc. Throwing such items directly into the trash may lead to identity theft.

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Author

Christopher F. Caldwell, EA

Professional Specialist

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