What are the Rules for Record Retention?

Now that tax season is drawing to a close, it may feel like a good time to declutter the accumulated piles of paperwork. But there are some recommended guidelines to be aware of before you discard any official documents. The following article outlines what you need to know about retaining tax records, important property documents, and personal legal documents.

Retention of Tax Records

As with many tax-related matters, the rules for retaining tax records can be complicated. However, it’s important to understand general guidance surrounding record retention in the event of an IRS or state audit. Further, certain lenders, co-op boards, or other private parties may also require copies of your tax returns as a requisite to lending or acquisition transactions.

While tax record retention periods vary from three years to indefinitely, certain events allow the IRS to go back six or more years. For this reason, our R&A advisors recommend that clients keep tax returns indefinitely and retain supporting documents for no less than six years. Here’s why: The IRS has a limited window for assessing tax, generally within three years after the filing date of the return—but the three-year statute of limitations has its exceptions.

After three years, taxpayers may not be exempt from an audit if the IRS has a well-reasoned suspicion of fraud or underreporting of income. The assessment time frame extends to six years if the IRS suspects an understatement of income by 25 percent or more. And in cases of suspected fraud or non-filing of tax returns, the IRS is not bound by any time period and can initiate an investigation at any time. In addition, documents that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses attributable to federal disasters, should be retained until the deductions expire, plus six years.

In addition, important documents also should be retained as a paper copy, as there are times when physical copies are needed to provide proof that they are not forged or fraudulent. If you file electronically, be sure to obtain a paper copy of your return as well.

Retention of Property Records

When it comes to records related to real estate transactions, we recommend holding onto them for as long as you own the property, plus six years. Why? Oftentimes tax implications can hinge on past events, so how long you need the records depends on when the tax impact happens. For instance, selling a home involves knowing your basis (purchase price + home improvements). If audited, you may need to provide documentation from previous years even though you no longer own the property. We recommend keeping real estate records for at least six years after filing your return for the year of sale. This applies even if you expect a home-sale exclusion, which can total up to $500,000 for married couples filing joint returns.

Here are a few examples of key real estate records to retain indefinitely:

  • Deeds and titles
  • Property surveys
  • Mortgage and loan statements
  • Homeowners insurance documents
  • Major capital improvement receipts
  • List of household possessions

Examples of real estate records to retain for six years after the sale of the property:

  • Closing documents
  • Property tax records
  • Home inspection reports
  • Association covenants
  • Form 1098 mortgage interest statements
  • Form 1099-S proceeds from real estate transactions
  • Receipts for minor improvements
  • Proof of residency (e.g., utility bills, voter registration, etc.)

In addition to real estate, the same retention guideline applies to other types of property as well, such as cars and securities. Similarly, you should generally retain records of securities trading for at least six years after filing your tax return for the year the securities were sold. Purchase confirmations should show date, quantity, and price at the time of purchase. Also, keep in mind, since reinvested dividends constitute a separate stock purchase, each reinvestment creates a distinct tax cost basis for those shares and requires detailed documentation that supports the calculation of your basis in the securities.

Retention of Personal Legal Documents

Beyond tax documents and property records, there are a host of personal legal documents to consider when weighing retention guidelines.

For example, estate planning documents related to an individual’s estate plan should be kept in a safe place indefinitely, including:

  • Wills
  • Trusts
  • Powers of attorney
  • Healthcare proxies

After the person’s passing, death-related documents, such as death certificates and all estate settlement documents, are recommended to be kept indefinitely as well.

In the event of a divorce or separation, each spouse should have copies of jointly filed tax returns, as both spouses bear liability for the information filed, and claims may be filed against either spouse for past deficiencies. Records linked to the divorce or separation also should be gathered and retained indefinitely.

Following is a list of documents to copy and save:

  • Divorce decree or legal separation agreement
  • Prenuptial agreements
  • Child custody agreements and dependency claims
  • Records of the cost of jointly owned property
  • Documentation of the cost or basis of property transferred by spouse during marriage or divorce

Final Considerations

While most records are kept in electronic form, it’s advisable to retain paper copies of important documents as well. Consider storing them in a safe deposit box or a fireproof box in your home to provide an extra layer of protection. If they’re stored on your computer, be sure to back up your computer’s hard drive, save files to an external storage source, and/or sync your files to the cloud.

In the case of lost or stolen records, most tax preparers and legal professionals will retain copies of important documents for at least three years, perhaps longer. Copies of tax returns, property acquisition closing documents, and securities purchases can most likely be furnished by your professional service provider if misplaced.

As always, contact your R&A advisor with any questions related to your specific situation.

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About this Author

Dave specializes in tax research, estates and trusts, complex partnerships, and corporate, not-for-profit, and private foundation tax compliance.