When Should I Discard Old Tax Records

When Should I Discard Old Tax Records

Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed.

 

See Relax Tax’s Tax Audit Assistance at relaxtax.com/audit

 

It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments that also apply to the state return.

 

 See this related post from Dennis Harabin: How Long Should You Keep Your Tax Records?
Individuals should hold on to their income tax records for at least 3 years after the due date of the return to which those records apply. However, if the original return was filed later than the due date, including if the taxpayer received an extension, the actual filing date is substituted for the due date. A few other circumstances can require taxpayers to keep these records for longer than 3 years.
 

In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has several exceptions:

  • The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
  • The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return to evade tax; or (c) deliberately tries to evade tax in any other manner.
  • The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.

 

See this related post from Dennis Harabin: The Benefits of Filing a Tax Return
These days the tax return is used for more than just collecting taxes. It has also become a tool for the government to provide social benefits. This article discusses the various reasons and resulting benefits available to you when you file, even if you are not required to, as you may be eligible for a refund of withholding or estimated payments or a refund as a result of a refundable tax credit or even a stimulus payment that you didn’t previously receive.
 

If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.  

Examples: Susan filed her 2020 tax return before the due date of April 15, 2021. She will be able to safely dispose of most of her records after April 15, 2024. On the other hand, Don filed his 2020 return on June 1, 2020. He needs to keep his records at least until June 1, 2024. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.

Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property. You should keep certain records for longer than 3 years. These records include:

  • Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed to prove the amount of profit (or loss) you had on the sale. Although brokers are now required in most cases to keep purchase records and report the information to the IRS when the stock is sold, it is still a good idea for you to maintain your own records, as you the taxpayer are ultimately responsible for proving the cost to the IRS if your return is audited.
  • Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after the final sale.
  • Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.

 

See this related post from Dennis Harabin: How Long Does The IRS Have to Collect When I owe Them Money
Have you ever wondered how long the IRS has to question and assess additional tax on your tax returns?  For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations.  But wait – as in all things taxes, it is not that clean cut. 
 

As we become more and more a paperless society, you may wonder if you must keep the paper version of the records mentioned in this article. No, you don’t – the paper documents can be scanned and maintained on your computer or in the cloud. But if you do convert the records to electronic files, be sure to maintain a back-up that can be retrieved if you have a computer crash or cyber attack that takes over your computer.   

If you have questions about what records to retain and what you can dispose of now, please give this office a call at 551-249-1040.

Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!

 

Recommended Readings: 

  • IRS Expanded the Identity Protection Pin Program for Taxpayers
  • Be In the Know: The Reason Why Your Tax Return Is Delayed
  • Avoiding IRS Tax Underpayment Penalties
  • The Different Circumstances of Education Tax Credits
  • Tax Considerations for New Businesses

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