It is the age-old question—how long should you keep tax documents? Many taxpayers are afraid to discard any tax returns, and the “stack” grows taller and taller each year.
Taxpayers must be able to store and retrieve records to convert to hard copies when documents must be produced. Here is some advice to keep in mind when going through your old tax documents.
Three-Year Rule…or Longer?
The three-year rule stems from the number of years the IRS generally has after the tax filing deadline to initiate an audit. In other words, the IRS has the right to request all tax returns filed during the “period of limitations,” which generally is three years from the date you filed for any given year. Bear in mind this includes all supporting documentation, including W-2 forms, capital-gains distributions and receipts for charitable donations. Starting with the 2014 tax year, taxpayers also had to begin to keep records showing minimum essential health care coverage.
However, more complex transactions in a tax year may call for longer retention of your returns. For example, if the cost-basis records for any property or securities sold are unclear, it is quite possible to under-report income. In fact, any time you believe you may have under-reported annual income, you should keep returns for the years in question.
The IRS recommends that taxpayers follow these guidelines:
- Keep records for three years if situations (4) and (5) do not apply to you.
- Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.
- Keep records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for six years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.
A Note on Property Records
For tax purposes, individual taxpayers and businesses should keep property records for one full year after the property is disposed. Keep in mind that the IRS can request original purchase documents, so it is important to keep records on both old and new property during this time period.
However, you may want to hold on to your property records for a longer period of time. For example, your insurance company or certain creditors may request the records, so you may not want to dispose of them until after you are certain you no longer need them for these purposes.
Georgia Statute of Limitations
While other states may have a longer statutes of limitations for the retention of tax returns, the Georgia Department of Revenue statute is consistent with that of the IRS. However, if a claim for refund is filed in Georgia within a six-month period – before the close of the statute of limitations period – the period of assessment is extended for six months beginning on the day the claim for refund was filed. If you are filing in more than one state, you should be aware of the statute of limitations for each state.
The information provided above is not a substitute for professional advice. Do not take any action on these matters until you have spoken with your professional advisor.
If you have any questions about issues affecting your taxes, please contact your Smith & Howard professional or anyone in the tax group at 404-874-6244.