As the IRS puts it, the duration of your tax record keeping depends on the “action, expense, or event” impacting those records.
Those actions, and those timelines, are important, as they impact the statute of limitations on any amendments to your tax return, or the federal government’s ability to demand additional tax payments from you.
To comply with IRS documentation mandates, keep the following tax records for the following time periods:
If you have under-reported any federal taxes, keep your tax documents from the past six years, starting with the year the taxes were under-reported. If you have failed to file a form, or filed a fraudulent form, don’t toss tax records away. The IRS has a legal right to review them.
The following information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making calculations if you file an amended return.
1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you: Keep records for three years.
2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return: Keep records for six years.
3. You file a fraudulent return: Keep records indefinitely.
4. You do not file a return: Keep records indefinitely.
5. You file a claim for credit or refund after you file your return: Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.
7. Keep all employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.
The following questions should be applied to each record as you decide whether to keep a document or throw it away:
Are the records connected to assets?
Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to determine any depreciation, amortization or depletion deduction, and to find the gain or loss when you sell or otherwise dispose of the property.
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Did you make nondeductible contributions to an IRA?
Then, as discussed above, you need to keep the following papers to verify the nontaxable part of distributions from your traditional and Roth IRAs . Here, from the IRS website, is a list of the forms and records you need to keep until all distributions are made:
- Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.
- Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years.
- Forms 5498, IRA Contribution Information, or similar statements you received each year showing contributions you made to a traditional IRA or Roth IRA.
- Forms 5498 or similar statements you received showing the value of your traditional IRAs
What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, do not discard them until you are certain you won’t need them for other purposes. For example, your insurance company or creditors may require you to keep records longer than the IRS does. When in doubt, play it safe and keep the records.
If the IRS finds a substantial error in your current return, they could go back six years into your tax history to investigate. However, you might want to keep your returns for even longer than that. Your tax records summarize your financial life. They contain important cost basis data that may be difficult to find several years from now. This is a less of a problem today because account custodians are now required to report and transfer cost data with assets. But why rely on the custodian when you have the info? Your return will also validate your income and whether you made retirement plan contributions. Best practices suggest you should hold on to your tax returns and supporting documents for as long as possible. In this era of electronic filing and record keeping, it’s an easy thing to do.
Neal Frankle, CFP®
Wealth Resources Group Westlake Village, CA