Keeping Your Tax Records: When can you get rid of them?

Did you make a New Year’s resolution to get organized this year? Maybe it was all that paperwork sitting around, or those boxes of old files that made you (or your significant other) say “I’ve had enough! We have got to stop living like pack rats.”

You probably have a lot of old paperwork related to old tax returns and your business. Why not give all that old stuff the heave-ho and start fresh? Let’s get those garbage bags we got from the mega discount store and get to work!

That sounds like a good idea, but let’s not start pitching just yet. The IRS has certain rules for how long you have to hold on to certain types of paperwork. So before we start clearing out the old junk, let’s take a look at what the rules are.

To start off with, the IRS has certain rules related to what to do if you do not file a return, file a fraudulent return, or do not report some income. I am certain you wouldn’t do that, but if it happens that you don’t file or filed a fraudulent return, you need to keep records related to the income and expenses for that year indefinitely. This is so that if you ever get caught, you will need to produce a good tax return. So it behooves you to file a correct return every year.

So if you do file a return, and either owe taxes or get a refund, keep these record for three years from the time the return was due, or two years after the tax you owed was paid, whichever is later. So for the return due April 15, 2015, you will need to keep these records until April 15, 2018. But if you owed taxes and didn’t pay them until December 15, 2016, maybe due to having an installment plan with the IRS, keep these records until December 15, 2018.

If you had a claim on your tax return for worthless securities, or took the bad debt deduction, you will need to keep the records related to this return for seven years.

Do you have employees in your business? You will need to keep all tax records related to those employees for at least 4 years after the later of the date that the tax becomes due or is paid.

How about record related to any property you have purchased. You will need to keep these records for as long as you own the property. In addition, once you sell the property, you will keep those records until the tax return is filed, and the period you need to keep the records for that tax return. The records for the property is needed to calculate the deduction for depreciation, amortization, or depletion, as well as to calculate the gain or loss when you sell or dispose of the property.

Do you have any stories about keeping records for a long period of time? I’d love to hear about it. Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Circular 230 Disclosure:  To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.

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