Spring Cleaning: Your Tax Records— Keep or Not?

March 19, 2015 – The sun is trying to stream though my windows, exposing the reality of their needing a wash. With temperatures dancing around 40 and that extra hour of daylight fueling my energy level, I am eager to begin spring cleaning. Even before the crocus peek through the snow piles, this time of year feels like another chance for a fresh start, purging the dirt and clutter that has amassed these past months. Not only do closets and basements beckon, burgeoning file cabinets call. Couple this with the looming tax deadlines, and there’s a good chance you are faced with residual piles of papers, receipts, statements and records.

Staring at them with contempt, perhaps you’re wondering why there is still so much paper in our supposed paperless world. What to keep? What to shred? We all have stinging memories of  separating ourselves of  something: a book, a piece of clothing, a receipt—then suffering remorse when the need for that exact item presents itself a day, a week, five years later. Before you go at your records like the Tasmanian Devil, keep in mind this statement about records retention:

It is important to retain relevant tax records in the event that the IRS — or another taxing authority — requires that those records be produced as part of an audit.

Keep at Least Three Years

The following records are commonly used to substantiate a taxpayer’s income and deductible expense items:

  • Form(s) W-2
  • Form(s) 1099
  • Form(s) K-1
  • Bank and brokerage statements
  • Canceled checks or other proof of payment of deductible expenses

At a minimum, the above tax records should be kept for a three-year period following the date that you file your return (or its due date, if later).

However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, but no fraud is discovered is six years. Therefore, it is ideal to retain the above documents for six years to better protect yourself in the event of an audit.

Similarly, you should keep investment records (brokerage statements, etc.) after you liquidate any given investment. Documentation that substantiates the gain or loss on an investment should be kept for the length of time that corresponds with the time frame that you retain other tax documents related to the return on which you report the sale.

Prior Years’ Tax Returns

It is also a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and any state income-tax returns (and any tax payments) indefinitely. For instance, the IRS or another taxing authority could claim that you never filed a particular year’s return. If that occurs, the IRS (or other authority) could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.

Need More Information?

The IRS addresses additional whys and wherefores. Here’s a video and  link for business and a primer

With fantasies of sparking windows and organized interiors worthy of a HGTV photo shoot, I wish you the fortitude to stay the course. If you have questions about record retention, please contact your Dopkins Tax Advisor.

About the Author

Dopkins Tax Advisory Group

Our more than 25 tax professionals include specialists who are proactive, strategic thinkers who work to maximize your cash flow. In addition to cash flow considerations, we also believe that tax planning is most effective when it is integrated with, and fully supports, your business plan and personal goals. Our approach to tax planning will help you better understand the tax implications of any proposed course of action, and together we can make the right decisions for your business. For more information, contact Robert Pollock, CPA at rpollock@dopkins.com.

Join Our Team

Whether you are evaluating career opportunities as an accountant, business consultant or IT professional, you'll want to know what differentiates Dopkins & Company from all the competition. Learn more today.

Careers