Many times throughout the year I get asked the question, “How long do I need to keep my tax records?”
Generally, you should keep your records to support income, deductions or tax credits until the statute of limitations for that item runs out. While the answer may depend on your exact circumstance, you should generally follow the guidelines below:
- Keep copies of your tax returns indefinitely. Additionally, you will want to keep CPA-prepared financial statements, contracts/leases, corporate board minutes and stock records, and journals/ledgers indefinitely.
- Keep records for at least 4 years from the date your tax return was originally due. While the normal statute of limitations on federal tax returns is three years, Michigan’s statute of limitations is four years. Records may include cancelled checks, bank deposit slips, bank and credit card statements, paid bills, entertainment records, sales receipts and inventory records.
- If you are claiming depreciation on your tax return, you should keep records to support the asset purchased for all years that the asset is being depreciated. This includes assets with 39-year lives. These records should be kept at least 4 years after the asset was disposed.
- If you buy or sell property, you should keep records regarding the purchase and any improvements made to the property until at least 4 years after the property was disposed.
- If you claim a loss from worthless securities of a bad debt deduction, keep the records supporting your basis for 7 years.
- If you did not file a tax return or filed a fraudulent return, keep your records indefinitely as the statute of limitations never expires.
Please note that under an IRS audit, you are generally guilty until you prove yourself innocent.
Essentially you must prove your deduction or credit claimed or it will be thrown out by the IRS. If you do not have proper records to support items claimed on your tax return, you will be denied the deduction or credit. Keeping both cancelled checks and other documentation (i.e. invoices, etc.) specifically stating the reason for the purchase are your best weapon against losing deductions and credits under IRS examination. If you paid with a credit card or bank account, keep copies of the monthly statements for those years still open under the statute of limitations to prove your payment was charged to you.
In deciding your own record retention schedule, consider keeping indefinitely those records which cannot be recreated by any other office, institution or governmental unit.
If you have further questions on record retention, please give us a call at (616) 642-9467 to speak with one of our CPAs or request a complimentary accounting consultation to discuss your circumstances further.
By: Joe Turnes, CPA
Photograph: Freeimages.com/Bob Smith
