RETENTION OF PERSONAL AND BUSINESS RECORDS

  A question often asked is, “How long must we keep our old records before they can be thrown out?” It depends on what records we are talking about. For the purpose of this article, we'll limit it to records related to your business and personal income tax returns, and related accounting records. Once you know the rules, much of it boils down to common sense.

  Capsulizing, the general rule is to keep your supporting records at least 7 years. For expenditures which relate to the purchase of assets, keep these records for 7 years beyond the year of sale. Lastly, keep copies of your tax returns indefinitely.

  The Federal and State taxing authorities require you to keep records to support your income and deductions. It is not an option. You must be able to produce support for your income and deductions in the event of audit. The burden of proof will be on you to prove things and if you can not, the IRS may disallow anything you can not support. So, what we must keep and for how long is contingent upon our exposure to IRS or State audit rules. Normally, the IRS can audit your return back 3 years from the original due date, but can reach back an additional 3 years if you understated your gross income by more than 25% in the first 3 preceding years (regardless of the reason). No time limit applies where a tax return was never filed. Likewise for frequently filed returns. Thus, keep these records for 6 years plus one additional year for timing.

  One of the exceptions to the 7 year rule is the records that relate to capital assets such as stocks, bonds, collectibles, and depreciable business assets. Here you must keep proof of the purchase date and cost for 7 years beyond the sale (or trade) of the capital asset. Also, some stocks pay stock dividends, split, or merge with other companies. You should retain these records and instructions as well to aid in the determination of your stock basis.

  Regarding your income tax returns, you should keep copies of your returns indefinitely. These may come in handy if you go to collect social security and the Social Security Administration informs you that they have no record of your earnings. Also, it may be necessary for you to prove certain tax attributes on prior years' returns such as depreciation, non deductible IRA contributions, and other carryovers from prior years.

  Just a final word on the type of medium on which your records are kept. In the past, all records were kept in a paper format; deposit slips, cancelled checks, bank statements, credit card statements, receipts, etcetera. However, some financial institutions now restrict customer access to records over the Internet or in CD format. While it is important to be on the cutting edge of technology, remember that computer access may be limited in the future if on an old outdated medium. It is probable that the CDs we are using today for storage will go the way of the now extinct 5 1/4 inch floppies, and soon to be 3 1/2 inch diskettes.

  If you have any further questions about records retention, give us a call with your questions.