RECORD AND DOCUMENT RETENTION Perhaps, you were hoping to contribute in a mild way to the waste pollution by discarding old financial records. Sorry, you may need to hang on even longer. This can easily cause problems for mobile Americans. Those who may be selling their homes soon, especially older couples, and moving to a retirement community will be trading spacious storage for what to them will seem like no room at all. They are busily getting rid of clothes, books, tools, scrapbooks and all the other belongings that people tend to acquire over many years.
KEEP EVERYTHING? Along with old theater programs and bronzed baby shoes, they have folders of canceled checks, bank statements and income tax records going back perhaps as far as the 1940's. They ask: "Which of these can be dumped?"
The traditional answer has been that "virtually everything except tax records for the past three years may be discarded." Taxpayers are required to retain documentation supporting claims on tax returns only until the statute of limitations has passed, a period of three years.
However, the catch is that the three year rule doesn't apply if the IRS claims your return has been false or fraudulent. It also does not apply if a prior year's return is in question, such as for the prior purchase of a "tax shelter."
Also, documents supporting a tax-loss carryforward, charitable carryforward, or depreciation schedule should be kept until they are no longer relevant.
As for old checks, the only ones that probably would be needed are those that would substantiate the basis of a home, including all improvements or any other capital asset.
NEW RETENTION RULES Because of the rules on the retention of certain tax records, in years to come many taxpayers will have to save more papers for longer periods. For example, anyone with passive losses that cannot be written off in the current year will have to retain the documentation until at least three years after the losses have been used. Taxpayers with non-deductible IRAs will have to hold on to all records pertaining to those accounts as long as the IRAs are in force, including tax returns and/or IRS Forms 5498, 1099-R and W-2P. This could be twenty to forty years.
Documentation detailing the acquisition and improvement of a primary home as well as a second home now must also be retained, not just to be able to prove one's basis but because the IRS requires it. Form 2119, giving details on the sale or exchange of a principal residence, must be kept as long as the costs of the home could be at issue. Since residence gains are "rolled up" into the successive purchases, a mobile family will accumulate many records. Otherwise, the taxable gain at the last sale will be overstated.
And to make matters worse, if all this record keeping requires you to rent a U-Haul or a storage facility, the cost is generally not deductible.
DOCUMENT RETENTION SCHEDULE Unless you operate a business, the required record keeping can be relatively simple. Because the burden of proof rests with the taxpayer, it is to your advantage to retain accurate and complete records, especially for deductions. The IRS generally will disallow deductions that cannot be adequately substantiated. This can often result in a 5% negligence penalty in addition to the tax and interest.
For many years, the primary information returns (IRS forms reporting amounts distributed to taxpayers that by law must be completed by banks, companies, etc.) that needed to be retained were merely those for interest or dividend income (Form 1099), and wages or salaries (W-2 Forms).
Since 1983, however, the IRS has been cross-checking additional income sources, such as state and local tax refunds, social security benefits, IRA contributions and IRA and pension disbursements.
And beginning with 1985 returns, the Service began a computer matching of information on alimony payments and mortgage interest deductions.
In addition to information returns, certain personal records should be retained, such as canceled checks, bank statements and receipts. These records are necessary to substantiate medical expenses, interest and taxes paid, charitable contributions and other deductible items.
It is also important to maintain investment information, such as stockbrokers' advice and real estate records, showing purchase price, proceeds from sales and investment-related deductions. If you own securities, it is important that you maintain a record of each security owned, including stock splits and stock dividends, to help determine your cost basis. Certificate numbers, number of shares and sales prices should be maintained.
If you deferred the tax on the gain from selling your old home by purchasing a new one, you should keep records relating to both houses to establish your basis in the new home. This will be a substantial amount of records if you have moved several times.
BUSINESS RECORDS The IRS requires substantiation to support business deductions, especially automobile expenses. Also, documentation should be retained to support the business or investment write-off of a personal computer. Other deductible business expenses should be substantiated as well. Besides receipts, an appointment book - listing meeting places, dates and times, business contacts and business purpose of the expense - is useful. For entertainment expenses exceeding $25, the IRS requires that receipts be retained - not just of the expense, but the business - related aspects of the activity.
Regardless of tax requirements, certain personal financial records should always be retained. Bank statements and the canceled checks returned with them generally should be held in case they are needed to settle any disputes. Receipts for major purchases and any copies of warranties you receive should be kept indefinitely. It is also important to keep good records (including photographs) of your valuables and household effects for insurance purposes.
STORAGE LOCATION Once it has been determined which records to retain, they should be stored in the proper place. An ordinary cabinet or desk drawer may be sufficient for the less important records, but all valuable or irreplaceable documents should be stored in a fireproof lockbox or safe, file cabinet or safe deposit box.
Records for insured items should be stored apart from the insured property to prevent the concurrent loss or destruction of both the records and the property.
TAX RECORDS There is no specific time requirement for personal record retention set forth by law.
However, a good general rule to follow is that prior years' tax returns, bank statements and canceled checks should be retained for at least six years.
Records supporting the accuracy of the income tax return should be kept for as long as they may be material in determining the tax liability. This is generally three years (the number of years the IRS has to audit a return) after the return is filed or two years after the tax was paid, whichever occurs later.
However, a six year period applies if there has been at least a 25% understatement of income.
Furthermore, if the IRS claims a taxpayer has submitted a fraudulent return or failed to file a return altogether, there is no limit on how many years the IRS has for assessment.
The following describes the type of document or record and the recommended period that each document should be held.
As a general "rule of thumb" one should save a record if it may be used for legal or tax oriented purposes, or if the cost or ownership of an item may be questioned in the future.
The basic guideline is the "statute of limitations" but the more conservative approach is "If in doubt - keep it!"
TWO YEARS Bank Reconciliations Duplicate Deposit Slips Routine Correspondence
MINIMUM THREE YEARS RETENTION Appliance Warranties (except those of 5 years) New & Used Car Warranties Appliance Purchase Agreements Insurance Policies (expired) Employee Applications Employee Records (after termination)
FIVE YEARS RETENTION Sales Commission Report Employee Business Expenses
SEVEN YEARS RETENTION Federal Tax Returns State & Local Tax Returns Items to Support Tax Returns Vendor Contracts Employee Contracts Options records (expired) Inventory Records Expense Analysis Records Invoices and Cash Receipts Payroll & Soc. Sec. Tax Returns W-2 Forms Mortgage Records Leases (expired) Personal Bank Statements Personal Canceled Checks* Property Damage Reports Accident Records Accident Release Forms * Relating to taxes, purchases, special contracts, etc. should be filed with papers pertaining to the transaction
TEN YEARS RETENTION Business Contracts Business Check Registers Business Accounting Journals Worker's Compensation Report
PERMANENT RETENTION Deeds & Titles Divorce Papers Mortgage Documents Marital Agreements Social Security Audits Parent's Wills Military Service Records Civil Service Records Corporate Tax Returns Adoption Papers Corporate Pension Records Patent Records / Trade Marks Corporate Labor Contracts Stock & Bond Certificates Articles of Incorporation Partnership or Corporate Tax Exemption Certificate Annual Financial Statements Audit Report of Accountants Depreciation Schedules Current Contracts & Leases Property Records
The retention holding period normally commences at the end of the fiscal year in which the paper was created. For contracts, employment records, etc. the holding period commences after termination or disposal of the underlying asset.
