Warm weather and rainy days bring the urge to purge. But before you clean your file cabinets or declutter your computer files, it's important to review these guidelines.
Federal Tax Records
It's a good idea to keep records that supportitems shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. Examples of supporting documents include canceled checks and receipts for alimony payments, charitable contributions, mortgage interest payments and retirement plan contributions. You can also file an amended tax return during this time frame if you missed a deduction, overlooked a credit or misreported income.
Which records can you throw away today? You can generally throw out records for the 2015 tax year, for which you filed a return in 2016.
You're not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there's suspicion of fraud or you don't file a tax return at all, there's no time limit for the IRS to launch an inquiry.
In addition, records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses for federal disasters, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.
There are also some cases when taxpayers get more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so don't toss out records that could result in refund claims for those items.
State Tax Records
The previous guidelines are all geared toward complying with federal tax obligations. Ask your tax advisor how long you should keep your records for state tax purposes, because some states have different statutes of limitations for auditing tax returns.
Plus, if you've been audited by the IRS, states generally have the right to resolve their own issues related to that tax year within a year of the federal audit's completion. So, hold on to all tax records related to an IRS audit for a year after it's completed.
Essential Personal Records
Your files probably contain more than just tax information. Certain essential documents should be kept indefinitely. Examples include:
- Birth and death certificates,
- Marriage licenses and divorce decrees,
- Social Security cards, and
- Military discharge papers.
These should be kept in a safe location, such as a locked file cabinet or safety deposit box. If stolen, essential documents can be used to steal your identity. In turn, a stolen identity can be used to file for bogus tax refunds or apply for credit under your name.
Bills and Receipts
In general, it's OK to shred most bills — like phone bills or credit card statements — when your payment clears your bank account or at year end. However, if a bill or receipt supports an item on your tax return, follow the tax guidance above.
If you purchase a big-ticket item — like jewelry, furniture or a computer — keep the bill for as long as you have the item. You never know if you'll need to substantiate an insurance claim in the event of loss or damage.
Real Estate Records
Keep your real estate records for as long as you own the property, plus three years after you dispose of it, and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing.
These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support calculations for rental property or home office deductions.
Investment Account Statements
To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, and dividend reinvestment and investment expenses, such as brokers' fees. It's a good idea to keep these records for as long as you own the investments, plus until the expiration of the statute of limitations for the relevant tax returns.
Likewise, the IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With Roth IRAs, it's more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you're ever questioned.
If an account is closed, treat IRA records with the same rules that apply to stocks and bonds. Don't dispose of any ownership documentation until the statute of limitations expires.
Before you clear your files of old financial records, discuss the records retention requirements with your tax advisor. You don't want to be caught empty-handed if an IRS or state tax auditor contacts you.
Guidelines for Small Businesses
The retention guidelines are slightly different for small business records. Here are some best practices to consider.
Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.
For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.
Sales Tax Returns
State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your tax advisor.
Employee and Payroll Records
Keep personnel records for three years after an employee has been terminated. Also maintain records that support employee earnings for at least four years. This time frame should cover various state and federal requirements. However, never throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.
Time cards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it's a best practice for all businesses to keep the files for several years in case questions arise.
Keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.
Important: The more records you store, the greater the likelihood that your data will be stolen or hacked. Destroying sensitive documents and files can reduce the chances that you or your company's employees and customers will become identity theft victims.