When Can You Dump Old Tax Records?
Article Highlights:
General statute is 3 years
Some states are longer
Fraud, failure to file and other issues can extend the statute
Keeping the actual return
Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed.
It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments that also apply to the state return.
In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has several exceptions:
The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return to evade tax; or (c) deliberately tries to evade tax in any other manner.
The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.
If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.
Examples: Susan filed her 2020 tax return before the due date of April 15, 2021. She will be able to safely dispose of most of her records after April 15, 2024. On the other hand, Don filed his 2020 return on June 1, 2020. He needs to keep his records at least until June 1, 2024. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.
Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property. You should keep certain records for longer than 3 years. These records include:
Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed to prove the amount of profit (or loss) you had on the sale. Although brokers are now required in most cases to keep purchase records and report the information to the IRS when the stock is sold, it is still a good idea for you to maintain your own records, as you the taxpayer are ultimately responsible for proving the cost to the IRS if your return is audited.
Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after the final sale.
Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.
As we become more and more a paperless society, you may wonder if you must keep the paper version of the records mentioned in this article. No, you don’t – the paper documents can be scanned and maintained on your computer or in the cloud. But if you do convert the records to electronic files, be sure to maintain a back-up that can be retrieved if you have a computer crash or cyber attack that takes over your computer.
If you have questions about what records to retain and what you can dispose of now, please give this office a call. now, please give this office a call.
Want tax & accounting tips and insights?
Sign up for our newsletter.
Our Team
At IAM Accounting LLC, we take pride in our diverse and experienced team of professionals, each dedicated to providing exceptional service in accounting, tax planning, payroll, and financial management. Our team members bring a wealth of knowledge from various financial backgrounds, working together to ensure that every client receives the personalized attention and expertise they deserve. From managing complex accounting operations to providing tax-saving strategies, we’re here to help you achieve your financial goals with precision and care.
-
Ibrahim Mohammed
Founder & Tax StrategistIbrahim leads IAM Accounting LLC, offering expert tax strategies and financial guidance to help clients reduce tax liabilities and achieve their financial goals.
-
Jasleen Daswal
ControllerJasleen is a highly skilled Controller with over five years of experience as a Chartered Accountant. She ensures accurate financial management and oversees accounting operations.
-
Sahil Shaikh
Chartered Accountant & Tax PreparerSahil is a Chartered Accountant and tax preparer with expertise in tax compliance, financial reporting, and strategic tax planning, helping clients optimize their financial outcomes.
-
Ankit Gupta
Accounts AssociateAnkit brings a wealth of experience in finance and accounting, providing key support in day-to-day financial operations to ensure accuracy and compliance.
-
Neha Sharma
Key Accounts ManagerNeha manages our most valued client relationships, with over four years of experience as a Chartered Accountant, ensuring that client needs are met efficiently and professionally.
-
Michael Holsinger
Payroll Representative, ADP PartnerMichael is our dedicated payroll expert and ADP partner, managing payroll processes with precision and helping clients navigate payroll services seamlessly.