Is your computer desktop filled with digital tax-related files that you do not know what to do with? Or are you finding your office filled with years’ worth of copies of tax documents, tax returns, receipts, canceled checks and other financial records? Although you may be tempted to get rid of everything after filing your 2017 income tax return. Here are some best practices to keep in mind.
General tax document rule
The most common rule is to keep all back up documentation of items that were shown on your tax return. This is until the statute of limitations runs out (usually three years from the due date of the return or the date you filed). That means this year (2018) you could get rid of any tax records for your 2014 filed tax return.
There are only some cases where you should keep tax documents for longer than the general rule. Situations in which this would apply are listed below:
- Filing a fraudulent tax return
- Failing to file a tax return
Regarding copies of the actual tax returns you will want to keep those permanently. You will be able to use them to quickly show that you did file a legitimate return. Also have it on hand in case you need it for any financial applications.
An important note to keep in mind, if you understate your gross income by more than 25%, the statute of limitations period is six years.
Document retention rules for businesses
The IRS suggests keeping any records validating costs and deductions associated with business property. Documents that are necessary to determine the basis and any gain or loss. This is when the property is sold for as long as you own the property, plus seven years.
Their guidelines also recommend keeping your employee records for three years after they have been terminated. In addition, you should maintain records that support employee earnings for at least four years. (This time-frame will largely cover varying state and federal requirements.) Also, as a business owner you should keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.
For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period.
Each state has different regulations for sales tax returns. Therefore, we recommend checking the rules for the states where you file sales tax returns. Retention periods typically range from three to six years.
When in doubt, don’t throw it out
It’s easy to accumulate a mountain of paperwork (physical or digital) from years of filing tax returns. If do not know with certainty whether you should keep a document, a good rule of thumb is to hold on to it for at least six years or, for property-related records, at least seven years after you dispose of the property. Regardless, you should keep tax returns themselves permanently. Please be aware that different rules or guidelines may apply to your specific situation. Contact us with any questions.