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Which Tax Records Can You Throw Out Now?

Maybe it's a good thing that the April tax filing deadline and the urge to spring clean coincide. But before you head to the trash can, make sure you're not disposing of tax records you might need.

In general, you must keep records that support items shown on your individual tax
return until the statute of limitations runs out — generally three years from the due date of the return, or the date you filed, whichever is later. In most cases, the IRS can audit your return for three years. You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported your income.

So, does that mean you're safe from an audit after three years? Not necessarily. There are exceptions:

 If the IRS has reason to believe your income was understated by 25 percent or more, the statute of limitations for an audit increases to six years.

 If there is suspicion of fraud or you don't file a tax return at all, there is no time limit for the IRS.

How Long to Keep Documents?

Like anything involving the IRS or other government agencies, there's no easy answer to that question. But here are some basic guidelines to follow for individuals (guidelines for businesses are in the right-hand chart below):

Completed tax returns. Many tax advisers recommend holding onto copies of finished tax returns forever. Why? So you can prove to the IRS that you actually filed. Even if you don't keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records. Written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least three years.

Exceptions. There are some cases when taxpayers get more than the usual three years to file amended returns. You have up to seven years to take deductions for bad debts or worthless securities, so don't toss out related records.

Real estate records. Keep these for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims, and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities. To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment, and investment expenses, such as broker fees. Keep them for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

Individual Retirement Accounts (IRAs). The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRA accounts. With the introduction of Roth IRAs, it's more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you're ever questioned.

If an account is closed, treat IRA records with the same rules as securities. Don't dispose of any ownership documentation until the statute of limitations expires.

Multi-year issues. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, per IRS instructions.

Burden of Proof

The burden of proof, or the responsibility to substantiate items on your tax return, at one time rested entirely on the taxpayer. Since the passage of the Internal Revenue Service Restructuring and Reform Act of 1998, the burden has shifted to the IRS in the event of a courtroom proceeding, but only if you meet the requirements to retain proper records and make them available for inspection. So while the law now takes some heat off taxpayers, it only applies if you diligently maintain records and cooperate with reasonable IRS requests.

Important: Before tossing out financial documents, shred them
thoroughly. Identity theft wreaks havoc in victims' lives after information is stolen and used for fraudulent purposes. One way identity thieves obtain confidential data is by rummaging through trash.

Why Meticulous Employment
Records are Important

Employee lawsuits against employers, seeking unpaid overtime pay, highlight the obligation to maintain accurate records of employee hours worked.

For example, since 2000, thousands of lawsuits have been filed by the School Litigation Group seeking to recover overtime pay for school janitors, cafeteria staff, bus drivers, teacher’s aides, assistant coaches, and other school support personnel. Attorneys with the School Litigation Group, assert that they are simply helping some of the poorest employees at schools in numerous states get overtime pay that they’ve been deprived of for years.

What makes these employers vulnerable? Some school districts, like other employers, haven’t kept good records of hours worked and paid for. Many employers keep inadequate records of employee hours worked…especially when employees  consistently work unscheduled hours that turn into overtime hours, week-after-week.

Yet, the laws governing overtime pay put the responsibility on employers to maintain accurate records of hours worked and hours paid.

So what happens when employees bring legal actions for overtime pay against employers who have inadequate or no records of employee hours worked? Courts generally rely on the employees’ own estimates of how many overtime hours they’ve worked and not gotten paid for. 

How to protect your business or organization:

   Take seriously the responsibility to keep accurate and complete records of hours worked and hours paid for. Managers and supervisors should make sure that time records turned in or completed by employees are accurate.

   Adopt a clear payroll and time-keeping policy. Put it in your employee handbook. State clearly: how employees are to record their time worked; that employees have an obligation to keep and submit to the employer accurate time records; employees can only work overtime hours with the approval of their supervisors, and employees who work overtime hours without approval will be disciplined.

   Train managers and supervisors in what they must do to enforce these policies and make certain that work hours reported by employees are accurate.


Record Guidelines

Employee earnings

Maintain for a minimum of 4 years, to meet state and federal requirements.

Employee time cards

Keep for at least 3 years if your business is subject to the Fair Labor Standards Act (engaged in interstate commerce), although it's a good practice for all businesses to keep the files for several years in case questions arise.

Personnel records

Retain 3 years after an employee has been terminated.

Employment tax records

Keep 4 years from the date the tax was due, or the date it was paid — whichever is longer.

Employee business expenses

For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the 3-year statute of limitations period.

Sales tax returns

State regulations vary. For example, New York generally requires sales tax records to be retained for 3 years, while California requires 4 years, and Arkansas, 6. Ask your tax adviser the required record retention period for returns and supporting documents.

Business property 

Records used to substantiate the cost and deductions (such as depreciation) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines. Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email:
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