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Records Retention

Originally Released on 10/7/04

Re-issued 11/01/07

 

You have asked for guidance on how long you should retain your personal income tax records. Copies of tax returns should never be thrown away according to the recommendation of the United States Tax Guide published by the Research Institute of America.

 

These records may have to be produced if the Internal Revenue Service (or state or local taxing authority) were to audit your return or seek to assess or collect a tax.

 

Keep records indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, the Internal Revenue Service can only audit your return within three years after the return was filed. The problem with the Federal three year rule is that the assessment period is extended to six years if more than 25% of the gross income is omitted from a return. Neither period begins until the tax return is filed.

 

While it is therefore impossible to be completely sure that the Service will not at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should be adequate. The retention times indicated here are for Federal returns only. State regulations will vary. Pennsylvania does not have a Statute of Limitations for the collection of taxes. It does have a 3 year limit for auditing tax returns.

 

SUGGESTED RECORDS RETENTION SCHEDULE

 

Tax Returns: Permanently. Attach W-2’s to tax return and save permanently. Work sheets and other documents to determine liability for 6 years.

Cancelled Checks: Permanently for important payments, such as taxes, purchase of land, special contracts, etc. These checks should be filed with the papers to which the transaction pertains. Other checks and bank statements, 3 years. If your bank does not return checks, then you must save your bank statements and check register.

 

Investments: Deeds and mortgages, permanently. Stocks and bonds, keep the broker’s statement for purchases and sales or the year end statement if cumulative for as long as you own the investment, or 6 years after the investment is sold and the income or loss has been declared on your tax return.

House: Profit on the sale of your home is not taxed if you have lived in house for 2 years and your profit will not exceed $250,000 for a single person and $500,000 for a married couple. If you do not meet these conditions, keep documents showing capital improvements to the home, permanently or until 6 years after the sale of the property. After you buy a home keep all house records for the first two years until you can determine if you meet the critera for tax exempt sale.

Insurance Policies: Property, house and liability, permanently for protection against future claims. Expired life, health, auto, policies for 6 years.

 

Retirement & Pension Records: Retirement and pension records, permanently.

 

IRA Contributions: If you made any non-deductible IRA contributions you should keep a copy of Federal Form 8606 until you receive all of your distributions from the IRA.

 

Remember: Keep your records in a safe place . As a paid preparer we are required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared. Most preparers comply with this rule by retaining copies for a period longer than the legally required three years. In most cases we retain copies of tax returns for 10 years on active clients, 5 years for inactive clients. There may be circumstances, however, where files have become corrupted and are not available , so it is vital that you are responsible for the safe keeping of your records.