Reprinted with permission from AOA.
Dear Accountant: How long should I hold my tax records?
In my accounting practice of over 20 years, I have been asked this question way too many times; hundreds, of times. Ideally, I would like to respond by stating NEVER throw away any of your paperwork, ever. But that is a highly impractical answer to a simple question. I certainly do not wish for my clients to become pack rats simply because the accountant said so. I also hear some of my older clients’ comment that their CPA (which would be me), is so organized that they do not need to organize their own paperwork. Reaching out to my office seems to be an easier option for them in times of need. I would not recommend that either.
Becoming self-reliant and independent in regards to your important documents and or paperwork keeps life simple.
There is no real cutoff date for tossing off paperwork. Here are a few guidelines to sort out through old files and keep only that which may be needed at a later date.
- Old Tax Returns and Records: You should keep your returns and related records for at least three years. As a general rule, the IRS has that duration to question items on your return and to bill you for any additional tax. It is also the time frame for you to file an amended return and seek a refund. However, the IRS can go back up to six years if a return omits more than 25 % of income. If fraud is proven, there is no limit. State returns may have to be retained longer.
- After Three Years: Do not automatically throw out all records and returns after three years. Look over your old documents to see if you might need any parts of them in the future.
- Regarding Property and Other Assets: Retain the files until at least three years after you dispose of the property. Heed this advice for property that you either inherited or received as a gift. For inheritances, you will need to know the date-of-death value. For gifts, you will need to know the donor’s cost. So you would be wise to keep documentation of these figures until after you sell the asset.
- Securities Transactions: They are assets too, so treat their documents and records similar to your property and other assets documents. Be sure to keep your purchase documents for taxable mutual funds, stocks and the like. You will need to include the purchase date and cost on your tax return in that year that you sell the assets. Other records to keep include, but are not limited to, stock splits, dividend reinvestments and non-taxable distributions. If you are unsure about whether to keep a document or not, ask your trusted accountant before you toss it out.
- Pay Ins to IRA etc.: If you have made nondeductible pay ins to IRAs or post-tax pay ins to a 401(K), you should keep records until three years after the accounts are depleted. Be sure to file Form 8606 to report nondeductible IRA contributions. If you do not, those contributions will be treated the same as deductible pay ins when withdrawn. Also, remember that all distributions from your traditional IRA will be subject to tax unless you can show otherwise. So make sure you retain copies of Form 8606 and your 1040s for each year that such pay ins are made. It would also behoove you to keep Form 5498 or similar statements that reflect the amount of IRA distributions.
- Small Businesses: If you run a small or large business, you need to keep payroll tax records for a minimum of four years after the due date for employees to file their income tax returns for the particular year. Data to be retained include wage amounts, payment dates and employee information. Also, copies of all W-4 forms, payroll returns and amounts and dates of tax deposits need to be retained. Copies of worker health coverage forms should be kept for at least three years after the deadline for filing these documents. These are the 1094 and 1095 forms that many employers are required to file to report employee health insurance data. Records on the cost of assets, depreciation etc., should be retained for decades.
