Tax Return Retention Policy

“How long should my client keep his/her tax returns and supporting documentation?” is a frequently asked question. The safe, quick answer is keep old tax returns, W-2’s, and information with tax planning relevance permanently. Keep less important supporting documentation for seven years.

Generally, the IRS has three years from the due date of the return to audit and adjust the return. Similarly, your client has three years following the due date to amend his return.

 
Sometimes the IRS has longer than three years to audit a return. For example, the IRS has six years to audit a return if a person fails to report over 25% of gross income. If a return is not filed, or a fraudulent return has been filed, the IRS can audit records for that tax year at any time.

All supporting documentation should be kept, including summaries, cancelled checks, receipts, and 1099’s for at least the three years following the due date of the tax return. To be safe, many advisers recommend these records be kept for seven years.

Tax returns and W-2s should be kept permanently. Keeping a tax return permanently provides support if the IRS contends your client did not file a return or filed a fraudulent return. Furthermore, you may need to refer to an old return to obtain information about:

• Home purchases and sales
• Depreciation of a home office, rental property, or business equipment
• Individual retirement account (IRA) contributions
• The purchase price of stocks, bonds, and mutual funds
• The taxability of pensions and annuities          

Keep W-2s permanently because they include important information about Social Security wages and withholdings and income tax withholdings. If you ever need to prove earnings or Social Security and Medicare contributions, you will have the records if W-2s are kept.

Supporting Documentation

Generally, most records can be destroyed after seven years. For tax planning support, however, there are countless situations when it is desirable to have records from earlier years. For example, when a client sells a home, it is necessary to calculate their gain. To calculate the gain, you need records of the cost of the home, improvements to the home, and depreciation of the home. For some people, this information may go back forty years or more. Furthermore, if you rolled over the gain on the pre-1998 sale of your prior home, it is necessary to have records for the prior home.

Another example of when earlier records are helpful is when your client sells mutual funds. There are several planning strategies you can use to reduce your client’s gain in this situation. To use them, however, it is necessary to have information about purchases, distributions, and sales from earlier years.

In summary, you should never throw out tax returns, W-2s, and records might have future tax relevance. In particular, you should keep all home records, brokers’ statements for securities you still own, and retirement plan information. You should keep other tax-related records for seven years.

NOTE: A current Earnings and Benefit Statement can be requested on the Internet at www.socialsecurity.gov. Earnings records should be verified frequently. Errors discovered after three years have passed are difficult to correct. Also, socialsecurity.gov can be used to get an estimate of future Social Security benefits based on an actual Social Security earnings record.

Julie Welch (Runtz) is the owner of Meara Welch Browne. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri- Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.