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Record Keeping for Individuals and Small BusinessesIndividualsHow long should I keep records? You must keep your records for as long as they are important for the federal tax law. Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. The period of limitations is the period of time after which no legal action can be brought. For assessment of tax you owe, this generally is 3 years from the date you filed the return. For filing a claim for credit or refund, this generally is 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date. You may need to keep records relating to the basis of property longer than the period of limitations. Keep those records as long as they are important in figuring the basis of the original or replacement property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. If you receive a Form W-2, keep Copy C until you begin receiving social security benefits. This will help protect those benefits, just in case there is a question about your work record or earnings in a particular year. The Social Security Administration suggests that you confirm your work record with them from time to time. What records should I keep? You must keep records so that you can prepare a complete and accurate income tax return. The law does not require any special form of records. However, you should keep all receipts, canceled checks or other proof of payment, and any other records to support any deductions or credits you claim. If you file a claim for refund, you must be able to prove by your records that you have overpaid your tax. Information from www.irs.gov.
Small BusinessesKeep your records for as long as you might need them. The length of time you should keep a document depends on the action, expense, or event the document records. The following questions should be applied to each record as you decide whether to keep a document or throw it away. Do the records support an entry in my tax return? Records you could use to verify the information you report on your tax return should be kept as long as an audit is possible. The IRS normally has 3 years to audit a return. That period, called a statute of limitations, begins the day the return is filed, or the due date if the return is filed earlier, and can be extended for a number of reasons. Examples include 2 to 3 years following additional claims filed later by you, or a total of 6 years for understating your income by more than 25 percent. For records that would help you through an audit, a conservative approach is to keep them for 7 years. Are the records connected to business property? Some records establish the basis (or value) of property for depreciation deductions or for calculating the gain or loss at sale. These records should be held for as long as you have the property plus the same 7 years as above. Do the records support deductions that will be applied to other tax years? Sometimes deductions, such as limited charitable contributions, casualty losses, or net operating losses, are carried forward or backward and applied to other tax years. Records that substantiate the original loss or expense should be retained for as many years as you are carrying forward the deduction plus the same 7 years as above.
William H. Bunch, CPA, PA |
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