We are now officially in what the Internal Revenue Service (IRS) refers to as the “filing season”. Forms W-2 and 1099 should be in the mail by now and should be showing up in your mailbox (the “snail mail” one – not the virtual one) soon.
Soon you’ll be organizing your tax records for the purpose of filing your federal (and, perhaps, state or local) tax returns for 2018. And many of us will have a lot of records to organize.
Guidelines for Keeping Tax Records
How long do we need to keep those records before we run them through the shredder? The answer depends on the situation.
Common guidelines are 1) 3 years; 2) 7 years; and 3) forever. Here’s what the IRS says: “Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.” The IRS defines “period of limitations” as “…the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.”
Period of Limitations and Negligence
The period of limitations on a regular tax return is three years from the due date of the return. So if you file your 2018 tax return on March 1, 2019, the statute would expire on April 15, 2022.
However for negligence, or if you claimed for a loss from worthless securities or a bad debt deduction, the period is 7 years.
As negligence is in the eye of the beholder (e.g., even if you felt your return was correct, an audit was opened because the IRS suspected negligence), it’s probably wise to keep your tax records for 7 years just in case they are needed.
Records You Should Keep Even Longer
If you do not file a return, keep your records indefinitely. Ditto if you file a fraudulent return.
There are some circumstances in which you might want to keep records longer than suggested for reasons other than this year’s tax return. A good example of this is records connected to property, either your principal residence (to establish basis) or income property (to compute items such as depreciation). You should keep those records until the period of limitations for the year in which you dispose of the property has expired.
When in doubt, keep the records longer, rather than for a shorter period of time. Who among us hasn’t found that we needed a document or item a short time after we had disposed of it.