You made it through tax filing season, and now you have a nagging desire to declutter and streamline your tax-related files. Before you fire up the shredder, however, it’s important to understand what documents you should keep and what is OK to toss. Below is a quick overview of the necessary retention periods for tax-related documents, but as always, your RKL tax advisor can answer questions about specific situations or documents.
Tax Documents to Keep Indefinitely
- Tax returns: It’s a good idea to hold onto your tax returns forever. Old returns can be used to file amended tax returns or to help prepare future returns. They can also be beneficial to your heirs. This is not limited to the federal 1040 – it is also a good idea to permanently retain state and local income tax returns as well as gift, estate, inheritance, and personal property tax returns. There is no legal requirement for the format in which records are retained, so you can digitize them to save space.
- Some supporting tax correspondence: Keep a permanent record of certain income tax documentation (beyond the 1040 itself) that can be used for future filing. Examples are items such as K-1 forms or other purchase documents that would be used to establish tax basis for a future sale. Included in this category are records of the initial cost of land, buildings, equipment, and other property, including improvement and addition costs. Be sure to keep all correspondence with state or federal revenue departments, or any examination reports conducted by revenue agents.
Tax Documents to Keep for Six or Seven Years
- Financial records used in a tax return: The IRS can generally audit taxpayers up to three years after an on-time filing, but in some cases and for certain items, they have six years after the filing to get additional tax. Conversely, taxpayers can also recover overpayments of tax in some instances during this same time period. So it’s important that you keep records to support items shown on your income tax returns until this statute of limitations expires. Some of these records may also be helpful to support deductions taken in future years. Examples of supporting records include:
- Bank statements
- Mutual fund or brokerage statements
- Mortgage interest statements
- Receipts for medical expenses or other taxes paid
- Business bills, accounting records and subsidiary ledgers
Even when your records are no longer needed for income tax purposes, you should not discard them until you can be sure they are not needed for other purposes, such as insurance claims or loan applications. Check out our guide on record retention requirements for tips on a wider array of financial documents beyond tax-related matters.
Just as your business or personal financial situation is unique, so is the need for differing timeframes of tax record retention. RKL’s tax professionals can answer your specific questions about tax record retention. Contact your advisor or one of our local offices for assistance.
Contributed by Robert M. Gratalo, CPA, MST, partner in RKL’s Tax Services Group. Rob specializes in federal and state taxation of privately held businesses in the construction, manufacturing and distribution, real estate development, architecture and engineering and service industries.