Which financial records should you keep?

Personal Tax and Other Records: What to Keep and What to Toss

Maybe it’s a good thing that the April federal tax deadline coincides with the urge to spring clean. It feels good to throw out some of the financial records stuffing your filing cabinets. But before you head for the dumpster, make sure you’re not disposing of files you may need. You don’t want to be caught empty-handed if an IRS auditor contacts you.

IRS Audits and Amended Returns

In general, you must keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. That means that now you can generally throw out records for the 2014 tax year, for which you filed a return in 2015.

But keep your files for the past three tax years because the IRS can audit your returns for a minimum of three years after you file. You can also file an amended return on IRS Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income.

But you are not necessarily safe from an audit after three years have passed. There are a couple of key exceptions to this general rule:

  1. The statute of limitations increases to six years if the IRS has reason to believe you understated your income by 25 percent or more
  2. There is no time limit if the IRS suspects fraud or you do not file a tax return.

Various Retention Requirements

Keeping records for three years is the general rule. There are exceptions for certain files. In some cases, there is no easy answer to the question of how long you should keep specific papers. The IRS does not require you to keep records in any particular way. But here are some basic guidelines for individuals to follow.

Completed tax returns

Some tax advisors recommend that you hold onto copies of completed, filed returns for your lifetime. The reason is so that you can prove to the IRS that you actually filed if there’s ever a question about it. Even if you don’t keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records

Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices, and sales records, should generally be kept for at least three years.

Exceptions

There are times when you may be entitled to more than the usual three years to file an amended return. For instance, you have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out files that could result in refund claims for those items.

Real estate records

Keep real estate records for as long as you own the property, plus three years after you sell (or otherwise dispose of) it and report the transaction on your tax return. Throughout ownership of the property, keep documentation of the purchase, as well as receipts for home improvements, insurance claims, and documents relating to refinancing. These records may help prove your adjusted basis in the home, which is needed to calculate the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment, and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

Individual Retirement Accounts (IRAs)

The IRS requires you to keep copies of Forms 86065498 and 1099-R until all the money is withdrawn from your IRA accounts. Now that Roth IRAs have been added into the mix for some retirement savers, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned. If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.

Issues affecting more than one year

Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards or casualty losses, should be saved until the deductions no longer have an effect, plus seven years, according to IRS instructions.

Digital Storage

To avoid the clutter of paper records, you can scan all of your documents into a a digital format, such as Adobe PDF, and store them on secure cloud drive.

Dispose of your Records Safely

One critical step to take when cleaning out hard copy financial documents is to shred them thoroughly before you toss them out.

Brady Ware offers a downloadable individual records retention brochure. If you have questions about destroying any tax or accounting records, please contact your Brady Ware advisor.

Dayton – 800.893.4283

Columbus – 866.502.8555

Richmond – 800.515.5536

Atlanta – 404.257.9475

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