Have you ever wondered how long you
should keep the documents and record that support the items included on your
income tax returns? When determining how long to keep records, we typically
look at the relevant statute of limitations period – the period of time a
taxpayer can amend a return to claim a credit or refund or the IRS can assess
additional tax. 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. However, if a
return includes a substantial understatement of income (defined as omitting 25%
or more of the gross income 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 statute of limitations period. Using this
approach, you should keep most of your income tax records for a minimum of four
years. Certain tax records should be kept longer. Records documenting the cost
basis of property that could be sold (like investment property or business
fixed assets) should be retained based on the record retention period for the
year the property is sold. Tax returns, IRS and state audit reports, business
ledgers and financial statements normally should be retained indefinitely.
Keep in mind there may be non-tax
reasons to keep certain tax records beyond the time needed for tax purposes.
For example, insurance policies, leases, real estate closing statements and
employee payroll records might need to be kept longer. As a final note, with
many businesses moving to a more “paperless” environment, the same
recommendations apply to computer records and electronic storage systems, as to
paper documents.
Jim Story, Manager - Tax Department
