How long should I keep records?

IRS requirements for retaining tax related documents vary greatly depending on the event, expense or action the document records. Determining the proper length of time for each record can be confusing to taxpayers causing them to just save everything, resulting in a mass of unneeded paperwork.

Generally income tax records properly filed should be held for three years, however the IRS suggests keeping a copy of your tax returns indefinitely. Employment tax records have a four-year threshold from the payment date. Claims for credits or refunds should be retained for three years and claims filed for losses from worthless securities and or bad debt deductions require a seven-year retention. Retention periods for documents connected to assets like property are tied to the year in which you dispose of the property in a taxable disposition, however, you must retain records to account for depletion deductions, depreciation, or amortization so you can report any gain or loss when you sell or dispose of the property. While these are basic, general requirements they are not without caveats and this is where a qualified and experienced tax preparer can guide the taxpayer in proper document retention. 

Taxpayers should also consider which records must be retained for non-tax purposes. Agencies other then the IRS, like insurance providers or creditors, may require longer retention rates then the IRS. 

Another important consideration for taxpayers is the security of their retained documents, and the ability of family members or representatives to access the documents in the case of an emergency. All sensitive and irreplaceable documents should be kept safe from fire, flood and especially burglary. You may think no one is interested in your tax return; however, identity thieves are interested in your tax refund. All a thief needs is your social security number to file a fraudulent tax return and cash that refund check. The IRS reports that since 2008 tax return identity theft is up 650%, with over 650,000 cases currently unsolved. A safe or safety deposit box is a good solution for sensitive records and or where the original paper document must be retained. Scanning and securely storing digitized copies of these documents is another good measure against permanent loss, but those records should also be securely stored. 

Again, make sure a designated family member or representative knows how to access your vital documents in a time of crisis. Qualified estate planners and tax professionals in addition to helping you protect your assets can help you determine which documents you must retain and should be held under lock and key as well as creating an organized system for your financial records management.

The U.S. Tax code is currently 4 million words long. IRS provided guidance to filing taxes and all the requirements for document retention, stands 1 foot tall when printed. Since 2001 there have been 4,680 changes to the tax code, this averages to about 1 per day. It is no wonder that a majority of U.S. taxpayers hire a tax professional to prepare their returns, plan their estates and guide them in asset management. 

Think you know what tax documents to keep and what to toss? Ever been wrong?  

Check back for our next post on Twenty Questions you should ask when hiring a CPA.

Posted on March 8, 2013 and filed under Filing Taxes.