LGT's Profit Sense

With the winter season behind us and warmer weather ahead, spring cleaning is rapidly approaching. One item that taxpayers consider purging are old tax records. A quick search online usually reveals a three year window of document retention but there are some circumstances were you need to hang onto documents longer.

Some key items to keep in mind when reading the list below:

• The expiration of each item is based on the filing year, not the tax form year. For example:
  • The 2019 income tax return is filing in 2020. Therefore, taxpayers need to add the number of years to retain the document to the year filed, 2020 versus the tax form year. In this case, a three year period will end in 2023.
• The expiration date of each item is based on when the return was filed. For example:
  • Similar to the example above, if the 2019 return was filed by 4/15/2020, the date the three year period ends is 4/15/2023. If the return was extended and filed by 6/15/2020, the three year period ends 6/15/2023 NOT the extended due date of 10/15/2023.
• This list a general listing of items. Like most items in the world of taxation, exceptions due apply so contact your advisor before purging documents.
• It is ok to keep records beyond the years below. If you’d prefer to keep records in perpetuity, scanning the documents and keeping them on a secure hard drive will help cut down in clutter.

Keep your tax records for 3 years if:

• All income was reported.
• No fraud was committed (see below if there was fraud).
• You filed a claim for credit or refund after your return was filed.

Keep your tax record for 4 years if:

• You have employment based tax to report. Employment taxes carry a longer statute of limitations.

Keep your tax records for 6 years if:

• You may have underreported your income by a substantial amount. The IRS deems an under payment of 25% or more to be substantial which will keep the statute of limitations open for 6 years

Keep your tax records for 7 years if:

• You filed you return with a loss from worthless securities or have a deductible bad debt deduction.       Losses from bonds, traded securities, and private held businesses are a few examples of such items.

Keep your tax records indefinitely if:

• You purchased property. In the year you purchased the property, you’ll need to keep the HUD statement or other legal document supporting the purchase price.
• You do not file a return each year. If a return hasn’t been filed, there is no statute of limitations.
• You filed a fraudulent return. This differs from underreported income. If you feel you’ve filed a fraudulent return, you’ll want to take the necessary steps immediately to correct this before the IRS comes knocking.

Download LGT's Document Retention Guide