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Von Lehman: What Tax Records Should You Keep & For How Long?

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Even though next year’s tax return deadline is several months away, it’s important to not procrastinate any longer — it’s time to get tax records organized. This brief article explains which records should be kept and for how long.
 
Retention Guidelines for Organizing Tax Records
Admit it: You should have organized, filed or purged your old tax records last spring after you completed your tax return. But one thing led to another and now it’s the end of the year, and you still have a pile of receipts and forms gathering dust on your desk. 
 
Even though next year’s tax return deadline is several months away, don’t procrastinate any longer. It’s time to get organized. Besides, you don’t want your relatives to think you’re a slob when they come to visit over the holidays!
 
The first question that may come to mind before digging in is: How long do I need to hold on to these records? At minimum, you’ll want to comply with the IRS’s statute of limitations: Keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return or, if later, three years after the tax return’s original due date.
 
Bear in mind that you’ll need to hang on to certain records beyond the statute of limitations. It’s wise to keep tax returns themselves forever. It’s OK to shred the supporting documents after the statute of limitations runs out, but you never know when you might need a copy of an individual tax return.
 
For W-2 forms, consider holding them at least until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings 
for a particular year.If you’ve sold a piece of property, keep your closing documents and records related to capital improvements for at least three years after you file your return for the year in which you sell the property. As you do with property records, retain investment records for at least three years after you file the return for the year in which you sell stock or other securities.
 
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IRS NOTE: 
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
 
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
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The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.
 
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
 
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IRS NOTE: 
Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3. You file a fraudulent return; keep records indefinitely.
4. You do not file a return; keep records indefinitely.
5. You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
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For more information on this topic or many other tax, business and investment topics, contact your CPA, Business Advisor, or Jami Vallandingham, CPA, Shareholder at [email protected].
 
About VonLehman
Founded in 1946 and with offices in Kentucky, Ohio, and Indiana, VonLehman is a leading full-service CPA, business advisory and business turnaround firm. VonLehman provides forward-thinking accounting, tax, strategic business advice and turnaround services to closely-held businesses, not-for-profits and governmental entities throughout the Kentucky, Ohio and Indiana region. See www.vlcpa.com for more information.