Every tax return has what’s called a statute of limitations on it, which says how far back you can amend your tax return to get a refund, or how far back the IRS can look to assess additional tax. Generally, that statute of limitations is three years after you file a tax return. Let’s learn more about it
The General Three-Year Rule
For most clients, it’s going to be those three years that you’re going to want to make sure you keep your records for, either being able to say you had a mistake and go back and amend, or for the IRS to come to you and say they think something happened in a given year and need to see your records. For most people out there, it’s going to be three years after you file a tax return as the statute of limitations.
In general, the IRS has three years from the date the return was filed or three years from the date the return was due, whichever is later.
Keeping Your Tax Payroll Records
When You Need to Keep Records Longer
If you had worthless securities that you disposed of, or if you wrote off bad debts on a personal tax return, you’re going to keep those records for seven years.
If you omitted gross income greater than 25% of your tax return, then you need to keep your records for six years. What happens is the statute of limitations the IRS can go back and look at your taxes is three years, but if during an audit they find you’ve omitted gross income equal to 25% of your tax return, they can extend that statute of limitations back six years.
The IRS doesn’t necessarily have to know for sure that you’ve underreported your income, that’s what the audit is for, so if the IRS reasonably suspects it, they can go back six years.
Fraud and Unfiled Returns
If you committed fraud on your tax return, your tax return is open forever, so you have to keep your records forever. The IRS actually has forever to audit a return that you either did not file or that the IRS thinks is fraudulent, and that’s whether the return is actually fraudulent or the IRS just thinks it is.
You also need to make sure you keep employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later.
What Most Businesses Should Actually Plan For
For most people who are just doing a straightforward return, three years is probably pretty good, and if you have some deductions on top of that, you’re probably safe keeping it three years after it’s filed. At a bare minimum, records should be kept for three years, but preferably seven to ten years.
If you’re doing something questionable that requires resolution work, records need to be kept indefinitely at that point.
Records for Real Estate and Long-Term Assets
If you own real estate, like a rental property, you more or less want to keep those records until you actually dispose of it.
You’re going to want to keep records on all of that depreciation and the 1031 exchange, since you have to prove your depreciation, then your basis, and the 1031 exchange basis.
Keep those records for at least three years after you dispose of the property, though keeping them another six years after that is safer for a big transaction, in case anything ever comes into question.
What Records to Actually Keep
Bank statements and credit card statements should be kept, but just because the IRS sees an expense on a credit card statement doesn’t mean that alone proves it’s a legitimate business expense.
Reports from point-of-sale systems showing amounts collected, employment records like pay stubs and hours clocked, and bookkeeping records should also be kept. When migrating between accounting systems, printing and saving reports like the general ledger, profit and loss statement, and balance sheet is a good minimum practice.
Rules Specific to Corporations and Non-Incorporated Businesses
When a non-incorporated business ends, records must still be kept for six years from the year-end in which the business ended, using whatever date the business actually closed as that year-end. When a corporation dissolves, it must keep filing records for two years, along with records supporting its tax obligations, entitlements, and all records the corporation kept.
Records supporting documentation concerning long-term acquisitions and disposal of properties, the share register, and other historical information affecting a sale, liquidation, or wind-up of a business need to be kept indefinitely.
