With Tax Records, When In Doubt, Keep It
You’ve probably heard the expression, “when in doubt, toss it out.” That applies to just about everything except when you’re clearing out tax records!
So, when you’re inspired to clear out those tax files, don’t be too hasty about getting rid of them.
Many of my clients tend to be confused about what they need to keep and how long. It’s a good idea to do an annual review of the items you need to keep indefinitely and those that have a shorter shelf life.
Digital or Paper Records
In this digital age, the IRS accepts scanned documents. However, the burden of proof for an item of income or expense rests with you, the taxpayer. You will be responsible for scanning documents, receipts and emails after the year ends for easy access. In addition, if you have migrated to digital storage the method of storage and retrieval must be taken into account. When you are confident in your storage and retrieval method, you could probably keep all records indefinitely. And with cloud storage it is fairly safe to say that the sky is the limit.
Electronic records will be expected to be as accurate as paper records and you must be able to index, store, preserve, retrieve and reproduce the records in order to produce a hard copy if needed.
The Type of Document Determines How Long You Keep It
According to the IRS, how long to keep a document depends on the action, expense or event recorded by the document. Generally, keep records that support an item of income, deduction or credit shown on the tax return until the period of limitations for that tax return runs out.
Whether you are paperless or not, keep in mind that compliance includes federal (IRS) guidelines as well as state guidelines, as there is often a difference in the statute of limitations for both. For example, while the IRS has a three-year statute, the state of California has a four-year statute. Being caught throwing out 2013 tax data this year (even though it was filed in 2014) could be a real issue in the case of a state audit.
The IRS has provided the following guidelines:
Period of limitations that apply to income tax returns:
1. Keep records for three years if situations (4), (5), and (6) below do not apply.
2. Keep records for three years from the date of filing the original return or two years from the date the tax was paid, whichever is later, if filing a claim for credit or refund after filing the return.
3. Keep records for seven years if filing a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for six years if income that should been reported was not reported, and it is more than 25 percent of the gross income shown on the return.
5. Keep records indefinitely if not filing a return.
6. Keep records indefinitely if filing a fraudulent return.
7. Keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.
If You’re Not Sure, Keep It
When it comes to satisfying the IRS in an audit, you will want to have more information rather than less. So just keep as many records as you possibly can. So, do not follow the typical advice given when purging excess stuff. In this case, less is definitely not more.