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After you file your tax return for the year, it’s tempting to clean house by throwing out older returns and related documents. But it is essential to know which documents you need to keep and which you can safely shred.
 The guidelines below describe, in general terms, the records you should keep for federal tax purposes. Each state may also have its own record retention requirements.
Completed Tax Returns
It’s generally wise to keep copies of your prior years’ tax returns forever so that, if an issue ever arises, you can prove to the IRS that you actually did file them. There is no statue of limitations for failing to file a return.
If you’ve lost or misplaced your copy of a previously filed return, you can request a copy from the IRS by calling 1.800.829.1040.
Substantiating Paperwork
You should retain all of the paperwork that backs up the items on your tax return for three years after the return is filed. That paperwork includes receipts (including those for flexible spending accounts), cancelled checks, W-2s and other supporting records.
Once again, the reason you must keep these items has to do with the statute of limitations. In most cases the IRS can audit your tax return for three years. You can also file an amended return during this time period if you missed a deduction, overlooked a credit or misreported your income.
There are, however, certain exceptions to the three-year rule.
 The IRS has up to six years to conduct an audit if you understate your income by more than 25 percent.
You have up to seven years to amend your return in order to take deductions for bad debts or worthless securities. Don't shred any records that would support such deductions.
If the IRS alleges your return is fraudulent, there is no statute of limitations. They can come after you at any time.
Investment Statements
Save information about stocks, bonds and other investments for as long as you own them. To calculate capital gains or losses, you need data from these statements that show the purchase date, price, commission and dividend reinvestment.
If you invest in limited partnerships or passive activities, you should retain all related records for three years after you sell your investment.
Individual Retirement Accounts
The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With the introduction of Roth IRAs, it's more important than ever to retain all IRA records pertaining to contributions and withdrawals in case you're ever questioned.
Real Estate
Save records that enable you to compute the basis or adjusted basis of your home. You'll need this information to determine depreciation for home office or rental purposes, as well as any taxable gain if you sell. Also keep records related to your purchase price, refinancing a mortgage, settlement or closing costs, the cost of improvements, casualty loss deductions and insurance reimbursements for casualty losses.
Generally, you should retain this information for as long as you own the property and, after you sell it, for the statute of limitations period that applies.
Multiple-year Write-offs
Save all documentation to support any deductions that you take over more than one year. If you carry over excess write-offs because they can't be deducted right away, you’ll need to save the related records even longer.
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If you have additional questions about the records
you need to maintain, give us a call.
And remember,
before you toss out any financial documents, shred them thoroughly. Identity theft is one of the fastest growing crimes in the country.
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Stephanie Ritchie is a CPA and a senior manager in Bader Martin’s Accounting and Assurance Services practice. She provides accounting and business consulting services to family and closely held businesses, with an emphasis on real estate and restaurant/lodging/hospitality companies. |
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