Spring Cleaning: When Can You Purge Your Old Financial Records?

Blog, Individual Taxes, Sales Tax, Small Business Tax, Tax Services

Feeling the urge to purge? Summer’s coming, so it’s likely you’re wrapping up your spring cleaning before your summer fun begins. April 17, 2018 was the deadline for individuals and C-corporations to file their federal income tax returns for 2017 (or to file for an extension). Before you throw out your old financial records, however, it’s important to make sure you aren’t throwing out records you would need if an IRS auditor paid you a visit.

For Individuals
In general, you must keep records that support items shown on your individual tax return until the statute of limitations runs out. This statute of limitations generally expires three years from the due date of the return or the date you filed it, whichever is later. That means now you can throw out records for the 2013 tax year, for which you filed a return in 2014. In most situations, the IRS can audit your return for three years after filing. You can also file an amended return on Form 1040X during this same period if you missed a deduction, overlooked a credit, or misreported income.

This doesn’t necessarily mean you’re safe from an audit after three years passes. There are some exceptions to the general rule. If the IRS has reason to believe your income was understated by 25% or more, for example, the statute of limitations for an audit increases to six years. The IRS can also launch an audit with no time limits if there is suspicion of fraud, or if you did not file a tax return at all.

Here are some basic guidelines for individuals.

Completed tax returns. While you could certainly dispose of your completed tax returns after a certain length of time, many tax advisors recommend that you hold onto copies of your finished tax returns forever. This is so you can prove to the IRS that you filed your taxes in case of a future audit. Should you choose not to hold on to the completed returns forever, it’s a good rule of thumb to hang onto them for at least six years after they were due or when they were filed, whichever was later.

Backup records. It’s recommended that any written evidence supporting figures listed on your tax return, including receipts, expense logs, bank notices, and sales records, should generally be kept for at least the three-year period after the tax year the tax return was due or when it was filed, whichever was later.

Important note: There are certain cases when taxpayers are allowed more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so any records that could result in refund claims for those items should not be disposed.

Real estate records. Keep all real estate records for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout your ownership, hold on to receipts for home improvements, insurance claims that could be relevant to your taxes, any records generated from purchase, and documents relating to refinancing. Such records help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities. To report accurately taxable events involving securities such as bonds or stocks, you must maintain detailed records of purchases and sales. Such records should include dates, prices, quantities, dividend reinvestment, and investment expenses like broker fees. For as long as you own these investments, keep your records. Dispose of such records after the statute of limitations for the relevant tax returns expires.

IRAs. Forms 8606, 5498, and 1099-R are all required to be kept until all monies are withdrawn from your individual retirement account (IRA). Even with Roth IRAs, make sure to retain all IRA records pertaining to withdrawals and contributions in case of future audit. When an IRA is closed, treat your records the same as securities paperwork: don’t dispose of any documentation until the statute of limitations expires for the relevant tax years.

Issues affecting more than one year. Certain unique situations will involve records that support figures affecting multiple years. Carryovers of charitable deductions, casualty losses, or net operating loss carrybacks/carryforwards can affect several years of tax filings. Records in these situations should be saved until the deductions no longer have effect, plus seven years, according to the IRS.

For Businesses
Businesses have slightly variable guidelines for record retention. Here are the basics.

Employee records. Keep personnel records for three years after an employee has been terminated, and keep any records that support employee earnings for at least four years. These timeframes should meet various state and federal requirements. (An exception to these recommendations includes any records that may involve unclaimed property, like an unclaimed final paycheck. These records should be kept indefinitely.) Specifically, timecards must be kept for three years if your business is subject to the Fair Labor Standards Act and engages in interstate commerce. Even if your business does not meet those criteria, keeping those files for three-to-four years is considered best practice.

Employment tax records. With regard to employment tax records, it’s advised to keep those for four years from the date the tax was due or the date it was paid, whichever is greater.

Travel and entertainment records. Records for travel and transportation expenses, like mileage logs and receipts, should be kept for the three-year statute of limitations.

Sales tax returns. These records are more complicated as regulations vary from state to state. Most states have adopted the three-year statute of limitations, though many require you to maintain those records for four years. The state of Florida is able to go back five years to audit for sales tax. Additionally, if the tax liability is understated by 25% or more, several states can go back six years in conducting an audit.

Business property. For records related to the cost and deductions (such as depreciation, amortization and depletion) of your business property, maintain those for as long as you own the property, plus seven years. These records must be kept to determine the basis and gain/loss for a sale.

Proper Disposal Protocol
As you dispose of any financial records, whether business or personal, always shred such documents thoroughly. As you dispose of printers, copiers, computers, or other electronic equipment that may contain financial data or information, be sure to use proper disposal protocol even if you’ve deleted the files. Without these precautions, tech-savvy hackers may be able to recreate important and sensitive data from the device’s hard drive.

Your Crippen & Co. tax advisor can answer any questions you have regarding retention of your financial records. Contact us today for more information.

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