Tuesday, April 22, 2014

How Long Do I Have To Keep My Tax Documents ... Really?


Recent question from a client:  I have tax returns back to 1988, I am having items shred, can I shred some of these?

My answer:  Under "normal" circumstances, you can be audited for 3 years from the date you filed a return or the April 15 deadline, whichever is later for a given year.  Just to be safe, I advise keeping all records used to justify income and deductions on a return for one year beyond that, or 4 years.  All records include such things as all the W-2s, 1099s, bank and credit card statements, invoices, receipts, calendars, mileage records, etc.  Scanned copies of all these is a good option, as long as you keep a backup in a separate physical location.  I particularly recommend scanning any receipts or other documents printed on thermal paper, because these rapidly fade to an unreadable, useless state.

"Normal" circumstances implies that
the IRS and any applicable state tax departments agree you filed the returns, didn't omit income or grossly overstate expenses (meaning by more than 20%), and claimed the correct basis for any capital assets sold.  If they decide they are going to contest one of those things, there is no statute of limitations to help you out.   I'm sure this is why so many people are so nervous about discarding their tax papers ever.  Just as an example, I had a client once who was contacted by the IRS 18 years after a specific tax year, with a claim that the return was never filed.  Thankfully, I was able to talk the IRS out of pursuing that one on the grounds that if they believed the filing hadn't been made, they should have come forward many years earlier and that my client had long since discarded the return copies in question, relying on the general 3 year rule.

That experience did increase my general level of concern, because I'm not certain I would have the same result for another client in a similar circumstance.  The following is the compromise I personally feel comfortable with, in the end this is a judgement call you will have to think about too:

Keep copies of all tax returns, along with certified mail receipts or other proof of filing, and cancelled check copies for any tax paid with the return.  Forever.  Thankfully, this should all fit in one bankers box.

Discard all the supporting documents for those returns after 4 years.  

Except, any documents supporting basis in a capital asset (real estate, vehicles, and equipment) need to be kept as long as you have that asset.  If you ultimately dispose of the asset in an exchange, then the basis transfers to the replacement asset and you continue to need to keep the documents until the replacement asset is disposed of.

Sadly, all of this is probably clear as mud, but I did try.  If this generates questions, please ask, and I will make every effort to clarify this.

Photo credit:  This was a picture I took today of some of my own files, with the names blotted out for privacy protection.  The picture, this blog post, and all of my blog posts, are copyright by me, 2014, all rights reserved.  Thank you.

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