Records Retention

By Kenneth H. Bridges, CPA, PFS     February 2016

“How long do I need to keep our old tax returns and related documents?”  This is a question I get often; and it is a simple question for which there is no simple answer.

The general rule is that the IRS has up until three years after you file an income tax return to examine it and assess additional tax for that year.  For example, if you filed your 2012 return on August 24, 2013, the IRS has up until August 24, 2016 to assess additional tax with respect to your 2012 return.  So, in this example, you should clearly retain a copy of your returns and all supporting documentation for years 2012 and forward until at least August 24, 2016.

There are a number of exceptions to this general 3-year rule. The statute of limitations is extended to 6 years if there is a “substantial omission of income” (defined as 20% of income),  the statute of limitations can be extended by consent, the statute can remain open with respect to Schedule K-1 items until the statute runs with respect to the related entity return, and the statute never begins to run if you did not file a return for a tax year or filed a fraudulent return for the year. Accordingly, it is conceivable that IRS could request copy of a return (and related documentation) from many years back (and/or evidence you filed such), and if that happened having a copy of return from 10 years or so ago could be helpful.  However, as a practical matter, it is highly unusual for the IRS to commence examination of a return more than three years after it is filed.

State taxing authorities may request a return or other information from many years back when they believe someone has been residing in the state or deriving revenue from the state but not filing there. This can particularly be an issue for multi-state businesses.

Documents pertaining to the purchase of a significant asset (e.g. closing statement from the purchase of a home) and any significant improvements thereto should be saved until at least 3 years after you file your income tax return for the year of sale of the asset.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.