Out With The Old? Not So Fast When It Comes To Disposing Of Tax Records

• Published date: 12 June 2021
• Subject Matter: Tax, Income Tax, Property Taxes
• Law Firm: Ostrow Reisin Berk & Abrams
• Author: Mr Robert Swenson

During the COVID-19 pandemic, most people have spent a lot of time at home, inspiring many to clear out some of the clutter in their living spaces. If you have decided to tackle the boxes, bins or drawers full of paper files that have accumulated over the years, you may be wondering when it is safe to dispose of tax records.

GENERAL RULES

Generally, you should keep tax records ' at a minimum ' until the statute of limitations has expired. During that time, you can amend your return to claim a credit or refund (or correct an error) and the IRS can audit your return and assess additional taxes. In either case, it is critical to retain all of your tax forms and supporting documentation, including receipts, canceled checks and bank and brokerage statements.

When does the limitations period expire? As a general rule, it runs for three years from the date you timely file your return or the original due date, whichever is later. For example, if you filed your 2020 return on March 1, 2021, the limitations period expires on April 15, 2024. But if you applied for an extension and file your return on September 30, 2021, the limitations period expires on September 30, 2024.

Do not get out the shredder just yet. In some cases, the statute of limitations stretches beyond three years. For example, it doubles to six years if you have understated your adjusted gross income by more than 25%, which does not necessarily mean you failed to report items of income.

An understatement can also result if, for example, you overstate the basis of property sold, thereby underreporting your gain. Also, the IRS is never barred from auditing your return and assessing tax if you do not file a return or if the IRS alleges that your return was fraudulent.

To be safe, it is advisable to keep tax records for at least six years; indefinitely if you do not file a return for a particular year or if you have taken any aggressive tax positions that the IRS might later characterize as inappropriate.

EXCEPTIONS FOR CERTAIN RECORDS

Special rules apply to certain types of records. For example, retain:

• Tax returns for at least...