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A common question asked of tax professionals by their clients is “how long do I need to keep my tax records and returns”.  As we approach the end of the year this question will be asked of us more and more.  This is a simple, but critical question.  As a tax preparer, and for the client, few things can be more frustrating than trying to put together an accounting of events or transactions in return preparation, or supporting tax deductions and transaction detail in an Internal Revenue Service examination, without the proper tax records.   We at Fragnoli & Company, CPAs in Brentwood, TN always tell our clients, with regard to tax records retention, to consider the following:

  • The Internal Revenue Service statutory period for examination is three years from the due date for filing your tax return, including extensions.  Accordingly, barring the exception below, if you filed your 2010 return on or before April 15 of 2011, the IRS has until April 15th 2014 to examine your tax return and propose adjustments.
  • If negligence is involved, the IRS has six years to go back and examine your tax returns.  Negligence is generally applied if there is a twenty-five percent change in the tax liability following agent adjustments or complete disregard and misapplication of the rules.
  • If fraud is alleged, there is no statutory period applied.  The IRS can go back as far as they wish.  If fraud is an issue, record retention will be the least of your problems.

Given these points, we recommend keeping your basic period records for six years.  The application of a negligence assessment is not uncommon.  Also, we recommend keeping a “permanent” file for records that might need to be held longer than six years.  Permanent records are items such as HUD statements for the purchase and/ or disposal of your residence and/ or rental properties from acquisition to disposal plus the six years as stated above.  Receipts and records of all capital improvements made to the respective properties for six years following disposal.   Portfolio records for the purchase and sale of stocks, bonds, mutual funds and like purchases up and until the investment is disposed of plus six years.  Records and receipts for all capital/ depreciated equipment used in a trade or business or associated with a rental property from time of purchase until date of disposal plus the six years.  In addition to these types of records, your “perm” file should also include trust documents, wills, articles of organization or incorporation for any entities you may have formed and been a part of as well as operating agreements and bylaws.  These are just examples of some of the items you need to keep in your permanent records file.  Check with your legal counsel or CPA if you have any questions.

Record retention is very important and a HUGE time saver if you are ever unfortunate enough to have to go through and Internal Revenue Service audit.  Records can also be helpful in the event of your death, or the death of a spouse or other family member.  Also, when you go to sell that rental property or stock portfolio, your tax preparer is going to ask for these records and having them at or near your fingertips will save you time and, probably, fees (at least with Fragnoli & Company, CPAs).  In this day and age of advanced technology, record retention doesn’t require large storage spaces and is easy and not very costly.  High speed scanners have dropped in price dramatically.  Direct data storage, such as an external hard drive, is cheap and sources for storage in the cloud are from free to very inexpensive.  You can scan directly to your computer and have it backed up by Carbonite for as little as $55 a year.  Storage in Dropbox and Evernote can be done for free.

We at our Firm cannot stress it highly enough that good record keeping AND record retention is critical for individuals and businesses alike.  If you have any questions pertaining to this matter, any other topics we have previously blogged about, or any issues pertaining to taxes, accounting or general consultation please feel free to contact us at jfragnolicpa.com or call our office at (615) 377-0705.