When to Shred Your Income Tax Return

How Long Should I Keep My Income Tax Records?

by David W. Taklender, CPA

Every so often, a client will ask me how long they should retain their tax documents.

I usually respond by stating “Probably not as long as you think.”

I smile when I say this because I would usually think of the client who once told me she still had her and her family’s tax returns from twenty years earlier and wanted to know if it was finally safe to throw them away!

The rules on document retention vary depending on whether you are talking about taxes  (Federal, State, Income, Employment), insurance policies, bankruptcies, creditors, etc.

For purposes of this column and based on my background, I will give you guidelines concerning your income tax documents.

According to the Internal Revenue Service:

The period (or statute) of limitations is a period of time that governs two events:

So, the first part of the answer would be that you should hold your tax documents until the statute of limitations for that tax year expires.

Sounds simple, now we just need to know how long that is, right? What is the number?

Nothing can ever be that easy when dealing with congress, so please….walk with me just a bit further.

The second part of our answer, in order to determine the statute of limitations, is that all-time favorite response, “it depends.”

It really does depend because there exists a “grey area” here in the periods depending on three circumstances ,

Answering these three circumstances one by one…

FIRST : The IRS oftentimes will have a different statute of limitations than some state taxing agencies. For example, California has a four-year statute compared to the IRS, which at its lowest level has a three-year statute of limitations. So we have to determine if we are talking about State tax returns or Federal (IRS) tax returns.

SECOND : In this article we are talking  income tax returns . But for other tax returns, such as payroll taxes, the retention period may vary. For example, the IRS period of limitations for payroll taxes is different from the one for income taxes (four years vs. three years, respectively).

THIRD : Different events can extend the statute for additional years, and a situation like fraud can extend it indefinitely – meaning the return may be examined, and additional taxes may be imposed at any time in the future.

The following represents a list from the Internal Revenue Service of the various periods of limitations that pertaining to your income tax returns , and unless otherwise stated, the years refer to the period after the return was filed:

1. If you file a timely filed return, or one where you owe additional tax and situations (2), (3) and (4) below, do not apply to you; then keep records for 3 years.
2. If you do not report income that you should report, and it is more than 25% of the gross income shown on your return; then keep records for 6 years.
3. If you file a fraudulent return; then keep records indefinitely.
4. If you do not file a return at all; then keep records indefinitely.
5. If you file a claim for credit or refund after you file your return; then keep records for 3 years from the date you filed your original returns or 2 years from the date you paid the tax, whichever is later.
6. If you file a claim for a loss from worthless securities (Section 1244 stock) or a bad debt deduction; then keep records for 7 years.
7. Regarding payroll taxes, you should keep all employment tax records for at least 4 years after the date that the tax become due or is paid, whichever is later.

NOTE: Regarding conformity issues at the state level, the California Franchise Tax Board makes clear on their website that an extended statute period, beyond the standard four years, may apply if your federal return is under audit.

Finally, when your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. As briefly mentioned earlier, you insurance company or creditors may require you to keep them longer than the IRS does.