One of the most frequent questions for CPA’s regarding taxes is in regards to records. So many people have old documents and records from years ago that they’re scared to destroy.

Before we can answer how long you need to keep records, it might be helpful to give a little information on why records need to be kept at all.

Records are normally retained for one of two reasons:

  1. Just in case the IRS or a state agency wants to check the information on your tax returns.
  2. To follow the tax basis of capital assets so that the liability can be minimized when those assets have been disposed.

So how long should you keep the information?

Well, while some exceptions do apply, the general statute for assessing additional tax is three years from the return due date or the date on which the return had been filed, whichever occurs later.

Also, it’s important to remember that some states have a statute of limitations that is one year longer than the federal statutes.

Another thing to remember is that the federal three-year assessment period is lengthened to six years if an amount more than 25% of the gross income that was reported on a tax return.

The clock doesn’t begin running until a return has been filed. There is also no limit on the period of assessment when a taxpayer files false returns or wrong information in an attempt to evade taxation.

So as long as none of the exceptions describe your situation, for federal statutes, the majority of your tax records that are older than three years old can most likely be destroyed.

However, before you go rushing to the paper shredder, let’s make a few things clear. One of the issues that can arise with destroying records once the statute of limitations has passed for that year is that far too often, a taxpayer will combine normal tax record with the records that are required to validate the basis of capital assets. These should be kept separate and care should be taken that basis records are not destroyed before the statute expires for the year in which an asset had been disposed. When viewed in this lite, it seems to reason to keep records until this time and to have them separated by asset.

A few records that may fall within this category are the following.

  • Stock acquisition data
  • Stock and mutual fund statements
  • Tangible property purchase and improvement

These should all be kept for a minimum of four years after the year of sale in order to validate profit and loss.

If you have questions about your records or tax preparation, contact our Joplin office and we’ll be happy to talk to you.