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7 Expert Record Retention Facts: Here Is How To Combat Crammed Tax Files Now

by Tracey Hrica, EA Nov 21, 2020 | Share

record rention policy

Is your office starting to feel a little crowded?

Has your file cabinet erupted, and files, papers, and documents are covering every surface?

Not sure how long to keep your tax receipts and other documents?

Are you overwhelmed by the piles and looking for record retention guidelines?

Well, I’m glad you found this article. I will help you take back your life – well, at least your office.

Some people never throw away any tax records because they’re afraid of an IRS audit. But hoarding paperwork is unnecessary.

Luckily, the lookback time for audits is limited.

Let’s look at the IRS’s record retention policy. For reference, you can go to IRS: How long should I keep records?

Read on, and I’ll walk you through what you should keep and what can be fed to the shredder.

To Keep, or Not to Keep, that is the Question

Retention Fact #1. You Follow all the Rules

As long as you filed a return each year, the general rule of thumb is to keep tax records for three years.  

This rule applies if you reported all your income and done nothing fraudulent.

Today, you can generally throw out records for the 2016 tax year if you filed the return in April of 2017.

Retention Fact #2. You Claimed Certain Losses

Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.

What does that mean?

If you lost money in the stock market or extended a formal loan, which was not paid off, you need to keep your records longer. 

You can write off those losses on your tax returns in both cases but need to retain the records for seven years.

The IRS extends the statute of limitations in the case of securities losses, given the high potential for fraud in this field. 

Simply put, it would be easy for a taxpayer to try and claim a $10,000 deduction on a loan he never actually made.

Retention Fact #3. You Underreported Your Income

Keep records for six years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return. 

What can I say? 

I hope that you are not willingly underreporting your income.

If the IRS believes you claimed significantly less income than you earned, they have additional time to conduct an investigation and audit. 

You will need your records to back up any claims you made on your filings for an additional three years.

Underreported income is not the same as tax fraud. 

If the IRS believes that you filed a fraudulent return, it has no statute of limitations on an audit. More on that to follow.

Retention Fact #4. You Did Not File a Return

Keep records indefinitely if you do not file a return.  

You see, the three-year statute of limitations only applies once you file an income tax return.

If you don’t file a tax return, the statute of limitations never starts to run.

It’s never too late to file.  

The IRS will eventually uncover unfiled returns.

Remember that penalties and interest are time-based, so filing as soon as possible makes sense. If necessary, establish a payment plan to pay any balance due over time.

Retention Fact #5. You Filed a Fraudulent Return

Keep records indefinitely if you file a fraudulent return. 

Please – No fraudulent returns! 

The IRS will catch up with you one day, so hold on to those records as well as the number for an exceptional lawyer.

Retention Fact #6. You Have Employees

Keep employment tax records for at least another four years after filing the 4th quarter returns, usually due January 31st of the following year.

For example, you need to keep 2020 payroll records until February 2025.

Records should include:

  • Your employer identification number.
  • Amounts and dates of all wages.
  • Amounts of tips reported.
  • Names, addresses, social security numbers, and occupations of employees.
  • Dates of employment.
  • Sick-pay documentation.
  • Employee’s W4 forms.
  • Dates and amounts of tax deposits you made.
  • Copies of returns filed.

You should also read this: Independent Contractor or Employee? Here’s What You Need to Know About Worker Classification

Retention Fact #7. You Filed a Return

Keep the actual copy of your return indefinitely.

This retention fact is essential.

The statute of limitations only applies when you can prove you filed an income tax return. 

If the IRS doesn’t have a copy of your tax return, it’s going to assume you didn’t file one. 

You have to provide evidence that you filed it.

So, what specific tax documents should you keep?

Income Items:

  • W-2s
  • 1099s
  • K-1s

Expense Items:

  • Invoices
  • Receipts
  • Canceled checks 
  • Credit card statements
  • Bank statements

Items Related to Your Home:

  • Closing documents
  • Purchase and sales contracts
  • Proof of payment
  • Insurance records

Investments:

  • Annual brokerage statements
  • 1099s
  • Form 2439

Retirement accounts:

  • Annual statements
  • Form 5498 – Roth and traditional IRA contributions
  • Form 8606 – Nondeductible IRA contributions
  • 1099-R distribution records

Health Insurance:

  • 1095-A
  • 1095-B
  • 1095-C

Retention Fact: Bonus

Whew! We made it through the tax docs. However, you need to keep additional records if you own a business.  

The SBA developed a study guide titled Record Keeping for a Small Business

Now is also a great time to sign up for our newsletter: The Official Century Accounting Newsletter: Relevant News for Small Business Owners

Follow This Battle Plan and Your Files Will Be Thinner

Paperwork left unpurged can easily consume your office. 

Excessive documents expand into boxes, bins, and containers, which continue to spread throughout.

I’ve seen it all! 

But you can do this.

Schedule a few hours this weekend and sort and shred your old tax paperwork.

The Journal of Accountancy states, “If it’s not documented, it didn’t happen.”

So, keeping specific paperwork is crucial. But now you know how much documentation you need to keep on hand.

Now you know the IRS guidelines.

Don’t be afraid of the shredder anymore. 

Take your office back!

Do you know someone who would benefit from these tips?  Go ahead and share!

You may also be interested in:

S Corps – 4 Big Red Flags That Will Trigger an IRS Audit

Top Tax Mistakes Small Businesses Make

About the Author

Tracey Hrica, EA

Tracey Hrica joined the firm in 1995 as a bookkeeper. In 2012, she earned the designation of Enrolled Agent(EA), which enables her to prepare personal and business tax returns and represent clients before the IRS. To maintain the designation of EA, she must complete yearly continuing education in the areas of personal and business taxation. Working closely with her clients, Tracey’s primary areas of concentration are new client onboarding, client communication, research, and QuickBooks support. As a QuickBooks ProAdvisor, she works closely with clients who rely on QuickBooks for the day to day running of their business. Tracey has expertise in both QuickBooks Desktop and QuickBooks Online.

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