Year End Planning - Record Retention

It’s hard to believe another year is coming to an end. For many, the end of the year is thought of as a time to spend with friends and family during the holidays. However, even though people don’t like to think about it, the end of the year is also an important time to begin preparing for the upcoming tax season.


While gathering the paperwork needed to file the current year’s tax return and beginning to start a new file for the upcoming year, it is sometimes hard to know what information should be kept and for how long. Retaining and storing your income tax records is an important final step of your tax filing responsibility. This article will provide you with some of the rules for keeping your tax records, along with some information on storage options.


First of all, almost everyone knows that tax returns should be kept indefinitely. However, it is not necessary to keep documents supporting an item of income or deduction on a tax return that long. Generally, there are two things that should be considered when determining how long a supporting document should be kept;

1. the time frame over which the IRS can audit the return and assess a tax deficiency, and
2. the time frame you have to file an amended return. For most taxpayers, this period is three years from the original due date of the return or the date the return is filed, if later.

For example, if you filed your 2008 Form 1040 on or before April 15, 2009, the IRS has until April 15, 2012, to audit the return and assess a deficiency. However, if a return includes a substantial understatement of income, which is defined as omitting income exceeding 25% of the gross amount reported on the return, the statute of limitations period is extended to six years.

A good rule of thumb for keeping tax records is to add a year to the IRS statute of limitations period. If you use this approach, you should keep your income tax records for a minimum of four years. However, it may be more prudent to retain your records for seven years, which the IRS informally recommends. State tax rules must also be considered, but holding records long enough for IRS purposes will normally be adequate for federal and state tax purposes, assuming the returns were filed at the same time.


There are certain tax records that should be kept much longer than described above and some, indefinitely. For instance, records relating to the cost basis of property that could eventually be sold, such as investment property and business fixed assets, should be retained based on the record retention period for the year in which the property is disposed. Also, along with tax returns, there are other records that should be kept indefinitely. These records include IRS and state audit reports, business ledgers, financial statements, and corporate records. Attached is a schedule listing some recommended document retention time periods that may be a good reference to keep handy in case you ever have some questions on a certain document.


Even though a document may no longer be needed for tax purposes, keep in mind that there may be non-tax reasons to keep certain tax records. Examples might include documents such as insurance policies, leases, real estate closing statements, employment records, and other legal documents. It’s always a good idea to make sure documents will not be needed for any other purpose before disposing of them.


It’s also important to know that the IRS permits taxpayers to store certain tax documents electronically. Although the rules are aimed primarily at businesses and sole proprietors, they presumably apply to other individuals as well. The rules permit taxpayers to convert paper documents to electronic images and maintain only the electronic files. The paper documents can then be destroyed. However, certain requirements must be met to take advantage of an electronic storage system.


Hopefully this brief overview helps you understand the income tax record retention rules a little better. However, it may be a good idea to seek guidance from an accountant or attorney if you are ever unsure about whether or not a certain document can be discarded.

Recommended Document Retention Time Periods

This article was submitted by Rhonda Herzhaft, CPA with Conn, Geneva, and Robinson CPA Firm.  Rhonda has ten plus years of tax accounting related experience.