February 17, 2016
As you begin to collect and assemble tax documents, you might be looking to reclaim some precious storage space. Before you start cleaning out those closets and filing cabinets, make sure you are not shredding critical documents. CPAs are commonly asked, “How long should I keep…..?” The answer depends on the item, and there may be more than one factor to consider.
According to the Internal Revenue Service, documents and records that support the items reported on a tax return should be kept as long as the time period for the return is open. In general, the tax return period is open:
- At least 3 years from the filing date, including extensions, or 2 years from the date you paid the tax, whichever is later
- At least 6 years if a return underreports income by over 25% of the gross income
- At least 7 years for returns with bad debt claims and worthless security claims
- Indefinitely if a return has never been filed or a fraudulent return is filed
Hopefully, most of us would fall into the “at least 3 years” category for open tax years. The American Institute of CPAs suggests that tax returns and supporting documents be kept indefinitely. Documents used to prepare a tax return include bank statements, receipts, bookkeeping records, and generally anything that was the source document for a number on the tax return. Obviously, this can amount to a significant number of records. There is a wide gap between 3 years and indefinitely – so what is the best practice?
Some items should likely be maintained permanently:
asset cost records (real estate, stocks, bonds, etc.)
insurance policies; birth certificates
loan agreements including evidence of cancellation when retired
business formation documents
IRS elections and other legal documents.
The AICPA Guide to Small Business Recordkeeping for 2015 can be found at http://www.aicpa.org/Career/Marketing/Pages/Small-Business-Toolkit.aspx.
The IRS website at www.irs.gov includes record retention guidelines as well.
Be advised that certain creditors, insurance agencies, government agencies and others may have specific requirements that should be followed. Check with these groups and your attorney before permanently destroying any records.
Contact JPS to ask “How long should I keep…?” We will help you consider the factors unique to your situation as you develop your own record retention policy.
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About Johnson Price Sprinkle PA:
Johnson Price Sprinkle PA (JPS) is a leading certified public accounting firm in Western North Carolina, providing innovative solutions created specifically for small to mid-sized businesses. With a sixty-year history, JPS has built its practice on providing superior accounting and exceptional service, in taxation, business advisory and assurance, to move clients forward by giving them the power of a national firm with the attention of a community-based one.