Retention of Tax Records

‘Tis the season where our hearts and minds wander to the rites of spring – warmer days, baseball, golf, taxes… Yes, taxes! Congress and their endless tinkering with tax law has diverted our attention from what we enjoy thinking about to one of the two certainties in life – taxes (many view the other certainty, death, as a more palatable alternative).

We often hear the question – how long do I need to keep all of this tax stuff? As with all things related to taxes, Congress and the IRS have created such a jungle of rules that there is not an easy ‘one size fits all’ answer. However, I will hack my way through this jungle and summarize the why, what and how long of recordkeeping.

Why should we keep records?

First, good records provide support for taxable and non-taxable income. Second, they help track expenses and identify tax deductible items. Third, good records keep track of property cost to ultimately reduce future taxes. Fourth, they help you file tax returns quickly and accurately. Fifth, good records help explain all items reported on your tax return. Inability to produce good records could result in additional tax and penalty.

What kind of records should we keep?

The basic records that everybody should keep include the documents needed to prove income and expenses reported on your tax return. For example, W-2s, 1099s, K-1s, bank statements… would all be needed to prove income reported on your tax return. Similarly, cancelled checks, charitable receipts, 1098s, sales slips… would prove deductible expenses.

For those who own their home, closing statements, remodeling invoices, insurance records… would help support the total cost of the home and would be needed upon sale. For those with investment portfolios, detailed brokerage/mutual fund statements would help support the income, gain, loss and deductions related to the portfolio activities.

The general rule of thumb is that if an item is currently reported or will be reported on a future tax return, support for that item must be maintained. The more support, the better. Fortunately the IRS does not require the records be kept in a specific format. For those whose basements look like a library, feel free to convert the information into a digital format.

How long should we keep those records?

The general rule is that you should keep your records until the period of limitations for that particular tax year has run out. What does that mean? In short, the period of limitations is the time in which you can amend the return or the IRS can assess additional tax.
True to form, Congress has developed six different scenarios and differing periods of limitations for each. Those periods range from 3 years from the date the return was filed to no time limit for returns that are fraudulent or in instances where no return was filed.

Our advice to our clients is as follows: keep your tax returns forever but, as long as you have filed a non-fraudulent income tax return, feel free to destroy all supporting data seven years after the return was filed.

If you have any questions, please don’t hesitate to contact us. If you’re not currently a client, but would like to schedule an appointment, please contact Lisa Reynolds at (513) 792-6648 or [email protected].

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

We’d love to get to know more about you and
share with you how we can best help you.