Monday, September 10, 2012

Tax record retention policies

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