Spring Cleaning: How Long Should Tax Returns and Records Be Retained?

Updated March 2015

Under Section 6001, all taxpayers must keep their tax returns and records for as long as the documents might be needed for the administration of any provision of the Internal Revenue Code. 

What exactly does that mean?  First and foremost, it means that when in doubt, you should not discard your return or related records.  However, there are limitations on how long the IRS can assess tax, and certain records are more important to keep than others.

General Rule for Most Records – Statute of Limitations

At a minimum, you should retain your records throughout the duration of a tax return’s Statute of Limitations, because it is during that period that the IRS can propose additional assessments related to that return.  Generally, the IRS must assess tax within three years of the later of (a) the initial filing deadline or (b) the date a taxpayer files a return.  For example, if you file your 2011 Form 1040 on or before April 17, 2012, the IRS will have until April 17, 2015 to assess additional tax on that return.  If instead you file an extension, your 2011 1040 can be timely filed as late as October 15, 2012.  If, during that extension period, you file your 1040 on July 20, 2012, the Statute of Limitations for that 1040 ends on July 20, 2015.

Of course, many tax rules are accompanied by exceptions.  One exception relates to underreporting of income:  If a person underreports income by more than 25%, the IRS will have six years, rather than three, to assess tax.  Additionally, if a person reports a deduction for a worthless security, the IRS will have seven years to assess tax on that item.  Finally, if a person files a fraudulent return— or no return at all—there is no limit on the assessment period. 

In addition to the other documents, you should retain mailing receipts showing the dates returns were filed.  You, not the IRS, will have the burden of proving when a return was filed.

Documents that Substantiate Basis

Documents that support the cost basis of property should be retained even longer, because the cost basis is relevant until the property is sold.  For that reason, such records should be retained until three years (or possibly six years) after the return is filed that reports the property’s disposal.  For example, if you purchased a rental property in 1995 and sold it in 2011, consider keeping the records that support the initial cost of the property, cost of any subsequent improvements and amount of depreciation deductions until 2018 (six years past 2012, the year of filing).  Examples of records that provide information on the basis of property include brokerage statements, real estate closing documents, receipts for renovations and major purchases, and details regarding nondeductible IRA contributions.

Permanent Documentation

Gift tax returns and estate tax returns should be retained indefinitely, as should all legal documents such as wills and divorce, prenuptial, alimony, and trust agreements.  Keep all amendments and inform your tax advisor of any changes to these documents. 

Conclusion

The rules regarding record retention vary greatly depending on what action, expense or event the document supports.  If unsure – keep it!  Finally, although you should be saving many tax related records (often for longer than you would like), you do not have to maintain desk drawers stuffed with paper.  Instead, consider keeping electronic records instead of hard copies.  Any system that allows you to access and print legible copies in the future should be sufficient.  For taxpayers who are willing to scan their records into PDF files, for instance, reasonably well-indexed records can be maintained indefinitely and accessed easily.

For more information, please contact your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.