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Blogging Beyond the Numbers

When Is It Safe To Toss Your Tax Records?
Posted by: Jessica Grant 44 mins ago

October 15 was the extended due date for filing 2019 individual tax. If you didn’t file by then… you’re late! For those that have filed, you might wonder: Which tax records can you toss once you’re done? Now is a good time to go through old tax records and see what you can discard.

General Rule – 6-year retention period

At minimum, you should keep tax records for as long as the IRS and state department of revenue can audit your tax return or assess additional tax. This is generally three years after you file your return (and four years for most state auditors). This means you potentially can get rid of most records related to tax returns for 2015 and earlier years. 

However, the statute of limitations extends to six years for taxpayers who understated their adjusted gross income (AGI) by more than 25% (i.e., “understated” in plain language means omitting reportable taxable income). Because of this, we generally advise taxpayers to retain tax records for six years from the filing date, just to be safe.

Keep Certain Records Longer

You need to hang on to some tax-related records beyond the statute of limitations.

  • Keep the income tax returns themselves indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or if you filed a fraudulent one.) 
  • Retain W-2 forms until you begin receiving Social Security benefits.  Questions often arise regarding your earnings for a particular year, and your W-2 or a Schedule C or Schedule K-1 helps provide the documentation needed.
  • Keep real estate or investment records/statements for as long as you own the assets, plus at least three years after you sell/report them.  
  • For investments in partnerships/LLCs/S Corporations, owners’ basis schedules should be maintained; the entity basis schedule helps support the ability to claim losses as well as is useful in determining the ultimate gain/loss on the eventual sale of an entity.  The IRS has indicated flow-through entities and owners’ basis are a focus of future audit inquiries.
  • In years when you have a net operating loss, keep underlying tax records and tax returns which support the loss claimed in such years. Current tax rules allow a 5-year carryback period, so keeping records longer could save some taxes, too. 
  • Keep records associated with retirement accounts (IRAs and 401k) until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years. In the event you have a nondeductible IRA’s you will want to prove the total nondeductible IRA contributions.

Other reasons to retain records

Keep in mind that these are the federal tax record retention guidelines. In addition, lenders, co-op boards, and other third parties may require you to produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you. Contact us if you have questions or concerns when tax records can be safely destroyed.

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