Record Retention

A common question I receive is how long we need to keep copies of our tax returns and the backup records. Copies of the actual tax returns should be kept forever. While most returns can't be audited by IRS more than three years after they were submitted, there are dozens of reasons why information from them is crucial to locate decades later, including after you have passed away. As I mentioned earlier, one of the most difficult tasks for anyone is taking care of a decedent's affairs. Not having access to copies of previously filed tax returns, often going back decades, makes the job even tougher.

As far as all of the backup documentation for your tax returns, such as cancelled checks, receipts and bank statements, those don't need to be retained as long. While there is no universal answer to this, I usually advise keeping everything for at last five years after a tax return has been filed. That takes you past the normal three year statute of limitations for IRS, as well as the longer four years used by some states, such as the PRC. Of course, if you have an unsettled matter, such as an open IRS audit for which the statute has been extended, you should continue to hold onto all substantiating documentation until the matter is completely over with, which can often drag on for a dozen years or so.

When discussing the matter of backup receipts, you need to keep straight which are period expenses, such as phone bills and mortgage interest statements, and which are capital asset purchases. Since most assets don't trigger any tax consequences until they are sold, you need to hold onto the purchase info until at least five years after you have reported their sale on your tax return. This is important for purchases of stocks and real estate. Unless you are claiming depreciation on it, IRS won't have any reason to ask for proof of an asset's cost basis until after you have sold it.

In these times of fast changing technology, besides what you hold onto, it's important to keep tabs on how your records are maintained. As this article points out, if your crucial documents were created by certain software programs, you may be out of luck in a few years if you no longer have access to that program or one that can read those kinds of files. Similarly, the physical medium used is important. I still have a stash of the old real floppy 5.25" disks with some clients' data. None of my current computers has a drive that can read those disks; so I'm hoping I don't have a need for any of that data. If so, I do have some floppy disk drive that I can salvage from the dozens of old computers in our PC graveyard upstairs. Since many newer computers are being produced without any floppy drives, even the 3.25" disks may not be readable in the near future. Copying their data to a CD would be a good idea for long term storage. With DVDs close to killing the market for VHS, getting valuable data off of video tape cassettes and onto video CDs is a project we are going to be starting on soon.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/27/2003 03:07:00 PM Send this post: