Magazine article The CPA Journal

Federal and State Tax Records Retention

Magazine article The CPA Journal

Federal and State Tax Records Retention

Article excerpt

How Long Is Long Enough?

Many taxpayers feel a sense of information-and paper-overload. E-mail, junk mail, regular mail, voicemail, faxes, text messages, and other communications make managing the information flow more difficult. When it comes to the records required to substantiate the information submitted on income tax returns, identifying what to keep and how long to keep it becomes a problem. If anything, record-keeping requirements seem to be growing, as evidenced by the recently expanded requirements for receipts supporting charitable contributions. Records of stock transactions, retirement plan distributions, charitable contributions, childcare expenses, partnership K-Is, and similar materials must typically be kept for as long as taxpayers might need to produce them to support tax return disclosures.

While many businesses opt to digitize documents and keep them indefinitely, for many taxpayers this is impractical. All taxpayers, however, would benefit from knowing the required holding periods, because it would keep their tax records under control by indicating which documents they can safely discard. The problem is that information about these holding periods lies buried in various statutes and is not easy to find, even when contacting the local tax office. This article provides simple tables, based on federal and state statutes, as guidance for retention of evidence supporting income tax returns, both federal and state.

Federal Income Tax Returns

With respect to federal income tax returns, most taxpayers can safely keep supporting records for five years. Assessment of federal income tax by the IRS must generally occur within three years of the later of the date that the return was actually filed or the unextended due date of the return. This assessment period, combined with the portion of the year that the taxpayer held the document prior to the date the return was filed, would equal no more than five years in most cases, even when a possible extension is included.

Suppose, for example, that the taxpayer receives a fax on January 1, 2008, that contains information necessary to support amounts on 2008 Form 1040, filed on March 9, 2009. The IRS would have until April 16, 2012 (April 15, 2012, falls on a Sunday), to audit the return. If the taxpayer filed a six-month extension and did not file the return until October 15, 2009, the IRS would have until October 15, 2012, to complete an audit. Under these circumstances, the taxpayer would need to keep the fax for at least four years, nine months, and 15 days to be sure it was available to support the related item on the federal return.

Rather than calculating the precise holding period, a more practical and convenient approach is to have a general rule that is easy to remember and easy to follow. In this case, it would be to discard every document five years after it was issued. (Of course, evidence supporting the tax basis of property should be retained until the statute of limitations has run out on the return that reports the sale of that property.) Then it would be necessary only to look at the date on the document and determine if was generated more than five years ago when deciding whether to dispose of the document.

If the IRS cannot complete the audit by the deadline, it might ask the taxpayer to grant an extension of the statute of limitations. …

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