One of the most common questions regarding taxes is how long you should keep copies of your tax returns and supporting documents.

Do I have to keep this?

Record Retention Best Practices

Christina Henning, CPA

If you are like me, you are stuck at home during this quarantine and wondering how you accumulated so much “stuff”: toys, clothes and so much paperwork! One of the most common questions regarding taxes is how long you should keep copies of your tax returns and supporting documents. Below are recommended guidelines for items that should be kept indefinitely and others that can be added to the trash pile on your next round of “spring” cleaning.

For individual returns the statute of limitations is generally three years from the date the federal return is filed, but it is recommended all income tax returns and supporting documents be retained for at least seven years. Others, however, should be kept for longer periods. For example, if you purchase a home be sure to keep the original purchase agreement and copies of all major improvements done until three to six years after you sell the home and pay the taxes. You will need these items to support your cost reported in the year of sale.

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Bank statements and canceled checks should be kept for three years, while credit card statements can be discarded after your next payment appears on the statement.

Passports, proof of health insurance and warranty documents are just a few items that can be eliminated after they expire.

Some items you should keep permanently include:

  • Medical records
  • Individual retirement account records
  • Personal certificates: Birth, death, marriage and divorce are the most common.
  • Will and trust documents

Businesses require more hoarding than most individuals. The federal statute of limitations is normally three years, but there are many business documents and workpapers that will affect the business the entire time it is in existence.

Many items should be kept for seven years:

  • Payroll journal
  • Most canceled checks
  • Option records (expired)
  • Contracts and leases (expired)

While others should be kept permanently:

  • Legal documents
  • Auditors’ report and financial statements
  • Deeds, bills of sale, patent/trademark papers and any others showing ownership or interest in an asset
  • Cash receipts and disbursements journal
  • Property appraisals done by third parties
  • Notes payable ledgers and schedules
  • IRS or state tax adjustments

One of the biggest differences between individuals and businesses is the length of time the tax returns should be held. In most cases individuals can dispose of their tax returns after seven years. However, businesses should permanently keep copies of income tax returns, sales and use tax returns, year-end trial balances, depreciation schedules and canceled checks for tax payments.

If you put your business up for sale the potential buyer will want to see copies of these records to validate the mutually agreed upon sales price. Another example for keeping records for so long is after the sale of your business. Let’s say you have a business taxed as an S corporation or a partnership, and the IRS audits the year of the sale. They will want to see how you calculated your cost basis in the business to determine the amount of taxable gain. Doing this could require calculations going back to the initial date the business was established.

In June of 2019 there was an article about boxes of old tax records found in a public alley dumpster. To avoid this happening to you, we recommend securely disposing of your paper documents and electronic files. Some office supply stores and other companies offer the service of securely shredding your documents.

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There are a couple options to render data useless on hard drives or solid state drives. The first option is to run a Windows install and when going through the installer select “Remove Files and Clean the Drive”. Another option, according to an IT expert our office utilizes, is the good old fashioned way of taking a hammer to it. Be warned, if you do this you have to destroy both the casing AND the internal pieces or this method will be ineffective. This is not the most secure method, so you should probably go with wiping the drive, but the second option sounds like more fun to me. It doesn’t hurt to do both!

So the next time you organize your office or decide to do some “quarantine” cleaning, you may have more documents to add to your trash pile than you expected! For more information on record retention, see our Record Retention Guidelines.

Christina Henning, CPA, is a manager in the tax department, providing tax compliance and consulting services to high-net worth clients. She can reached at ChristinaH@hhcpa.com or 480-839-4900.