Record Retention – What Records Should I Keep?
By Maria C Blair, EA
Every year, we are asked by clients how long they have to keep tax returns and tax records. Many clients are surprised to hear that there is no simple answer to this question. The following, however, is a general summary that should prove helpful:
Individual and Business Income Tax Returns – Keep a copy of the income tax return indefinitely; keep all of the backup materials for 7 years from the due date of filing.
While they will likely never be needed, we recommend that taxpayers keep a copy of the actual tax return for every year. It is rare that a return from 10 years ago would need to be produced, but there are cases where it may be necessary. For instance, if a house was sold 10 years ago and the basis was rolled forward into a new home, which was then sold in the current year, that prior year return may be needed to prove the basis of the house.
The backup material, on the other hand, can be destroyed after 7 years from the original due date of filing. For example, if you filed your 2012 tax return on April 15, 2013, you should keep the backup materials until April 15, 2020 (if you filed the return on extension, you would keep it until October 15, 2020). Historically, if today is October 24, 2013, you should retain backup materials for 2012, 2011, 2010, 2009, 2008, 2007, and 2006.
For individuals, backup materials include any records to support income, deductions or credits that you report on the tax return. Income items include W-2’s, bank and brokerage statements, K-1’s and 1099’s. Deduction items include 1098 mortgage statements, property tax bills, charitable contribution acknowledgements, mileage logs, and receipts for business deductions. Credit items include child care expense bills, and tuition payments.
Business owners should keep items related to gross receipts, such as bank deposit slips, register tapes, invoices, credit card slips and Forms 1099-Misc. The backup documents for items related to purchases and expenses such as canceled checks, invoices, account statements, credit card receipts, and petty cash slips should also be kept for 7 years. Finally, any document needed to verify your assets, such as purchase and sales invoices, cancelled checks and real estate closing statements should be kept at least 7 years after the asset is disposed.
Business owners must keep all of the employment tax records for at least 4 years after the tax is due or paid.
Records of employment taxes must be retained for at least four years after filing the 4th quarter for the year. Records to be retained include:
- Your employer identification number.
- Amounts and dates of all wage, annuity, and pension payments.
- Amounts of tips reported.
- The fair market value of in-kind wages paid.
- Names, addresses, social security numbers, and occupations of employees and recipients.
- Any employee copies of Form W-2 that were returned to you as undeliverable.
- Dates of employment.
- Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
- Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
- Dates and amounts of tax deposits you made.
- Copies of returns filed.
- Records of allocated tips.
- Records of fringe benefits provided, including substantiation.
When the decision has been made that backup documents can be safely destroyed, the only recommended way to destroy documents is to have them shredded.
In this digital age, it is becoming easier to save and store tax returns and the records that support them on computers and flash drives. It is possible to invest in a scanner and save all of the prior year tax returns and records in a file on the computer. However, every hard drive on a computer will eventually fail and, if information has been scanned and stored on a computer’s hard drive, it is imperative to use a back-up system, whether to an external hard drive or to an encrypted website.There are many websites that will save documents in the “cloud”, but be sure that any site chosen is reputable and encrypted. Because back-ups can fail as well, it is also important to periodically check the external hard drive or the website to make sure that the information stored is accessible.
As stated at the outset, it is not possible to provide ironclad rules for every situation. The above guidelines are only if the taxpayer has not significantly “understated” the income on the tax returns, in which case the IRS has the ability to audit prior years indefinitely.
For more detailed information, please refer to IRS publications 552, 583 and 463, available at www.irs.gov.