How Long Should You Keep Tax Records?

A popular client question has always been, “How long should I keep my tax returns?”  My answer is something many neither expect nor want to hear. Many tax professionals, and even the IRS, suggest discarding tax documents after a certain period of time: 3 years, 6 years, etc. after filed.  My answer is usually, “Never.”

Those saying a certain number of years usually base it upon a particular IRS statute of limitations deadline.  IRS can audit a return after it’s been filed for 3 years under normal circumstances, for 6 years if there is a “substantial understatement”, and forever if there’s fraud.  Therefore, since you’re confident you’re not committing fraud, you should be safe at least after six (6) years, right? No.

My thought on keeping tax documents forever has nothing to do with fraud.  First, in today’s world where almost everyone has access to a scanner and ridiculous amounts of cheap electronic storage, there’s no reason to destroy your tax records.   

Now, onto why you need to keep your tax documents.  Some reasons apply to all taxpayers and some reasons regard specific situations where you may need to refer back to an older return.

First, let’s discuss the reason applicable to everyone.  It may come as a shock, but the Post Office occasionally does not deliver mail as promised, and, even when it does, there’s no guarantee the IRS or the Comptroller of Maryland will process your return.  I cannot count the number of times clients that file every year have called in a panic telling me they received a letter from the IRS or Comptroller of Maryland demanding they file a long past due return.  If you destroyed the tax return and all of your records and substantiation from that year, good luck recreating that return. If you receive a refund for that tax year, you are safe to assume that whoever issued the refund, the IRS or the Comptroller, received your return, but there are still other situations when you may need to refer back to those returns.

Occasionally there is a need to refer back to older tax returns for certain items.  Perhaps you were issued stock from your company and want proof that basis was established in a certain year.  Another example would be for certain elections, like the “real estate professional’ aggregation election, that can cause serious tax issues in later years if you are unable to show the election was ever made.  Some tax situations can be influenced by how income was reported in earlier years, giving you the ability to at least show consistency in tax treatment. There is also carry-over information that may be needed in the future. Then there are non-tax situations where knowing your income tax information can be useful.  

Getting older tax returns from the IRS can be very difficult. If the tax return was filed within the last three to four years, you can get a transcript fairly easily. For anything older, you may need to send them a Form 4506 with a check and then wait and call until you finally realize they are never sending it to you. On the bright side, they don’t cash your check until they send you your return. I’ve never had them cash a check yet.  

Therefore, until Murphy’s Law is repealed, keep your returns.  The risks associated with throwing away returns and tax records are just too great to justify not scanning and saving them.  

For further information regarding tax documentatio, please contact Jeff Rogyom at (410) 929-4578.

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