It is fairly well-settled among tax lawyers and tax accountants that the length of time you should keep a document depends on the expense, action, or event the document records. Generally, you must keep your tax records that support deductions on a tax return or an item of income until the period of limitations runs out for that return.
The period of limitations is the period of time that the IRS can assess additional tax or in which you can amend your tax return to claim a credit or refund. Below is information containing the periods of limitations that apply to income tax returns. The years mentioned below refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
It is important to note that you should keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3. You file a fraudulent return; keep records indefinitely.
4. You do not file a return; keep records indefinitely.
5. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7. You file a claim for credit or refund after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
For a more complete explanation, see my blog posting from August 6, 2007.
As you decide whether to keep a document or throw it away, consider whether the records are connected to assets. In other words, keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure any amortization, depletion deduction, or depreciation and to figure the gain or loss when you sell or otherwise dispose of the property.
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
If you have an existing business confronting a serious IRS tax audit or other examination, a federal or California state tax problem and would like to speak with a California business lawyer and former IRS tax lawyer about serving as your power of attorney, this is an important posting. Call Mitchell A. Port at (310) 559-5259.