I’ve Got to Keep It How Long!?

I’ve Got to Keep It How Long!?

By Justin K. White, CPA

As we roll into yet another new year, there is much to be excited about and to look forward to.  There are new opportunities, a new diet, a new resolution to stay on the diet, as well as some seasonal familiarities that bring us comfort.  One of these seasonal items is the mailing of tax documents.  You know, the envelopes emblazoned with “IMPORTANT TAX RETURN DOCUMENT ENCLOSED” on the front, sometimes even in color.  Although the preferred treatment for many is to throw it into a box or bag and ship off to your tax preparer, your responsibility does not end there.  After your tax documents are returned to you, they must be maintained for a record retention period as specified by the IRS.

The IRS recommends keeping copies of all tax returns filed as well as to maintain the records and support for those tax returns as follows:

  1. Keep records for three years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for six years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.  (https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records)

Additional requirements exist for property records.  Records related to the purchase of property must be maintained until the property is sold or disposed of.  Further, any records related to property involved in an exchange must be maintained until both the old and the new property have been sold or disposed of.

Now that the parameters have been established on how long to keep the documents, you’re most likely wondering what to do with these documents once the record retention period is up.  Well, there is no hard and fast rule on this, but I would like to offer three suggestions:

  1. Dog ate my homework – As you can see from the image above of my dog, Bullitt, the dog disposal technique is one option. Depending on your dog, this may range from simply leaving the documents out overnight, a spoonful of peanut butter, or by playing a competitive game of tug of war.  However, this method requires a dog determined to make the biggest mess possible to ensure proper shredding of sensitive information.  This method is not our Firm’s recommendation.
  2. Bonfire – After holding onto these documents for years and spending money to keep them protected from the elements, you deserve some return on investment in the form of energy and entertainment. What better way to enjoy this process than hosting a bonfire with your friends and family to roast marshmallows and make smores?  This method is not our Firm’s recommendation.
  3. Shredder – Shredding your documents will help to ensure your sensitive information will not be compromised once it leaves your possession. This is the easiest method, is secure, and the shredded documents can also be recycled.  It is our recommendation to shred any sensitive documents and to shred all tax documents once the retention period has been satisfied, as long as these documents are not required for other purposes.

I would love to hear from you for your disposal recommendations and techniques!