How Long Should Income Tax Records Be Retained?
With the first round of tax filing deadlines in the rearview mirror, many are wondering how long income tax records should be retained. Unfortunately, there are a lot of nuances. Generally, records that support an item of income, deduction, or credit shown on a tax return should be kept until the period of limitations for that return runs out. The period of limitations is the period of time in which a taxpayer can amend their tax return to claim a credit or refund, or the IRS can assess additional tax.
Per IRS guidance, the following period of limitations apply to income tax returns*:
- Keep records for three years if situations 4, 5, and 6 below do not apply.
- Keep records for three years from the date the original return was filed or two years from the date the tax was paid (whichever is later) if a claim is filed for credit or refund after the return is filed.
- Keep records for seven years if a claim is filed for a loss from worthless securities or bad debt deductions.
- Keep records for six years if income is not reported that should be reported, and it is more than 25% of the gross income shown on the return or represents more than $5,000 of income attributable to foreign financial assets.
- Keep records indefinitely if a return is not filed or if any foreign information returns fail to be filed.
- Keep records indefinitely if a fraudulent return is filed.
If the records are related to property – including land, buildings, stock, office equipment, and other assets – taxpayers should keep records until the period of limitations expires for the year in which they dispose of the property. They must keep these records to figure out depreciation, amortization, or depletion deductions, and to figure out the gain or loss when they sell or otherwise dispose of property. It is also important to consider that returns filed before the due date are treated as filed on the due date.
Additional situations to consider:
- If the taxpayer is an individual who doesn’t itemize on Schedule A or is a business with limited deductions, the number of documents they need to retain drops dramatically. For example, if the taxpayer isn’t claiming a charitable deduction, they don’t need to keep charitable donation receipts, letters, or cancelled checks.
- If the taxpayer pays taxes to a foreign government, they may be able to claim a foreign tax credit or deduction on their tax return. If a deduction was claimed for a given year, the taxpayer can change their mind within 10 years and claim a credit by filing an amended return (or has 10 years to correct a previously claimed foreign tax credit). Therefore, the taxpayer should save any records or documents related to foreign taxes paid for at least 10 years.
- If the taxpayer is carrying forward a capital loss, all of the returns reporting the capital loss carryforward are open until the capital loss carryforward is used. Documentation should be kept for all of those years following the general rules starting with the date the return is filed that uses the capital loss (which starts the period of limitations).
- If the taxpayer is carrying forward or back (in some situations) a net operating loss (NOL), it is important to keep documentation related to the year in which the NOL was generated. The period of limitations starts when the NOL is fully utilized.
- The taxpayer also needs to retain all records related to establishing the basis in property for the life of the property until the period of limitations expires on the tax return reporting the disposition of that property.
For the tax return itself, taxpayers should keep a permanent electronic or hard copy of each year’s tax returns and record of any payments made to the government indefinitely.
Finally, individual states may have different record retention policies. Taxpayers should understand the state tax implications as well. Common state rules include, for example:
- Indiana has a three-year statute of limitations and requires that records be kept for a minimum of three years.
- New York has a three-year statute of limitations but requires that records be kept for as long as they can become material in administering tax.
- Kentucky has a four-year statute of limitations and requires that tax payment records be maintained for seven years and all other income tax records for five years.
- Ohio has a four-year statute of limitations and requires that records be kept for four years.
- Tennessee has a three-year statute of limitations and requires records be kept for three years from Dec. 31 of the year in which the return was filed.
- Wisconsin has a four-year statute of limitations and requires records be kept for four years.
|Income tax returns (federal and state)||Permanently|
|Items supporting income, deductions, or credits (W-2s, 1099s, support for charitable contributions, etc.)||Three Years|
|If 25% or more of income is underreported or there is $5,000 or more missed foreign income, items supporting income, deductions, or credits||Six Years|
|Support for bad debt deductions or losses from worthless securities||Seven Years|
|If there is any concern that the return may be fraudulent or fail to report foreign informational returns||Permanently|
Please contact your KSM advisor with questions or complete this form.
*As a general rule, KSM recommends maintaining records for seven years due to inherent uncertainties.
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