Record Retention Rules - Income Tax Records
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Record Retention Rules - Income Tax Records 
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By: Julie Kim
Abstract:

Retaining and storing your income tax records is an important final step of your tax filing responsibility and well maintained tax return documentation is invaluable when it comes to an IRS audit.  Here are some tips on the rules for keeping your tax records, along with some information on storage options.

 

How long to keep most of your income tax records usually depends on the time frame during which the IRS can audit a return and assess a tax deficiency or you can file an amended return. Generally, this period is three years from the original due date of the return or the date the return is filed, if later. However, if a return omits income substantially (usually over 25%), a six-year limitation period on assessment applies. If a return is false or fraudulent, the IRS can assess anytime without regard to statutes of limitations.

 

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

 

 

Certain tax records, though, should be kept much longer than indicated above.  Records substantiating the cost basis of property that could eventually be sold, such as fixed assets and investments, should be retained based on the record retention period for the year the property is sold. Tax returns, results of an audit by IRS and state, and business ledgers and financial statements should normally be kept indefinitely.

 

It may be necessary to hold onto some records longer for non-tax reasons.  For example, insurance policies, leases, real estate closing statements, employment records, and other legal documents might need to be retained longer than needed for IRS purposes.