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Forever is a bit long to keep some tax documents

Q: I have boxes of old tax returns and receipts cluttering up my closet. I think I have my federal and Idaho tax returns since the early ’70s. How long do I really need to keep this stuff? Can I just shred it?

A:  In Publication 17, Your Federal Income Tax for Individuals, the IRS offers guidance on this subject by stating that you must keep your records until the period of limitations (often referred to as the statute of limitations) runs out. The period of limitations is the length of time that the IRS has to examine your return and assess additional tax, and during which you can amend your return. Generally, the statute of limitations is three years, but not always.

Here are the IRS guidelines from Publication 17:

  1. If you owe additional tax and situations (2), (3) and (4) below do not apply to you: Keep records for three years.
  2. If you do not report income that you should report, and it is more than 25 percent of the gross income shown on your return: Keep records for six years.
  3. If you file a fraudulent return: Keep records indefinitely.
  4. If you did not file a return: Keep records indefinitely.
  5. If you file a claim for credit or refund after you file your return: Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.
  6. If you file a claim for a loss from worthless securities or bad debt deduction: Keep records for seven years.

While I assume you won’t ever be accused of fraud or not filing your return, it is nevertheless a good rule of thumb to go with the longest time period in all these rules. So, for sake of simplicity, I would recommend that you keep your tax records a minimum of seven years.

The State of Idaho has similar rules stating that normally there is a three-year period in which a return can be examined, except in the case of fraud or failure to file. In those cases, the time period is unlimited. There are special rules to keep a return open if the U.S. tax return was audited and adjusted by the IRS. The time the state can review an amended Idaho return or amended U.S. return is three years from the date the amended return is filed or delivered to the state tax commission.

The need to keep your records also means you have to take steps to safeguard all the documents. Keeping your records in a fireproof file cabinet or safe, maintaining a second copy of documents in a separate location from the originals, or backing up records electronically is always wise. If you use a professional tax preparation service, you should ask about the company’s document retention policy. And while you are at it, photographing or videotaping the contents of your home, especially items of higher value, is a must.

Finally, just because you have held on to a document for seven years doesn’t mean you should immediately head for the shredder. It may be important to maintain certain records, such as asset purchase agreements, to support your cost basis in the property. Or the documents may be needed for insurance purposes or other matters unrelated to your tax return.

So while your tax returns from the early ’70s may have nostalgic value for you, it may be time to consider a bit of house cleaning.

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To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.

Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.

Have a question for Robbins? Email your question to news@idahobusinessreview.com. Enter “Talking Tax” in the subject line.

About Peter G. Robbins, CPA

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