How long should I keep my tax records?

The general rule for maintaining tax records is that they should be retained for as long as they may be material for any tax purpose. The general rule is pretty vague. So, below are some specific guidelines.

Do you want a handy records retention guide? Go to www.seidandco.com and scroll down to the bottom the home page. Click on “HOW LONG SHOULD I KEEP MY TAX RECORDS?” We have printed copies available in our office.

Before we go into the details, let’s look at how you maintain your records. Gone are the days of rooms full of file cabinets and garages with boxes stacked floor to ceiling. Today we can keep records electronically – scanned images of documents and documents that are in electronic format originally.

The method used to maintain your records is probably more important than the decision of which records to keep. Here’s a great general rule: Keep all of your records in a digital format. Literally millions of pieces of paper can be maintained on a flash drive that will neatly fit on your keychain (or more appropriately in your safety deposit box).

Why am I keeping These Records?

The reason we keep tax records each year is to be able to prepare our income tax returns. It’s not just to make our accountant’s life easier at tax time, the rules for maintaining records is part of the Internal Revenue Code (IRC). IRC Section 6001 and the corresponding Treasury Regulations require taxpayers to “keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses, and other amounts that affect their income tax liability for the year.”

Statute of Limitations

The length of time to maintain tax records depends on the statute of limitations for assessment of additional tax. For most people the federal statute of limitations is three (3) years after a tax return is filed. In California the statute of limitations is four (4) years. There are some special situations where the statute of limitations can be extended further: Four (4) years when making a determination of whether an activity is engaged in for profit; Six (6) years when at least 25% of your income was omitted from your tax return; seven (7) years for certain bad debts; and forever in the cases of failure to file a tax return or fraud.

Keep These Tax Records Indefinitely

Now let’s start with the tax records that individuals should never throw away. Individuals should keep copies of their federal and state income tax returns indefinitely. Even the paper copies of tax returns over a lifetime will probably not fill up more than a box or two. Tax returns contain substantial information about transactions that have occurred in the past that may be needed to calculate the tax effect of future transactions. Along with your income tax returns, hold onto any estate tax returns from family members where you received an inheritance. Gift tax returns fit into the same category – they will be needed by your heirs when preparing your estate tax return.

For businesses the list of items to never throw away includes business entity formation documents, corporate minutes & retirement plan records, tax returns (income, payroll, and excise) and financial statements.

Keep These Records for Five Years

Hold onto transaction type records for five years past the date the of the tax year in which the transaction occurred. Transaction type records are invoices, checks, deposit slips, purchase documents, sales records, paid bills, accounts receivable and accounts payable ledgers, bank statements and reconciliations.

For example, if you paid your real estate taxes on your home in 2011 keep the notice from the county assessor’s office and your cancelled check or other proof of payment until 2016.

Capital Assets

For certain assets you should keep the records pertaining to the cost of acquisition of the asset for five (5) years after the date of its disposition. Capital assets include stock, bond and mutual fund investments, other investments, real estate (including your personal residence), artwork or other collectibles, precious metals held for investment purposes, and vehicles.

If you need more information on how long to keep specific records, ask one of the tax professionals at Seid & Company, CPAs.