Record Rention

ABC Guide For Record Retention

Best Recommendation For Record Keeping

You must preserve your records for as long as they are required for the administration of any Internal Revenue Code provision. In most cases, this means you must preserve documents that support the items on your return until the statute of limitations for that return expires. The statute of limitations is the time restriction within which you can amend your return to claim a credit or refund, or the IRS can collect extra tax, whichever comes first. The limits periods for income tax returns are listed in Table 1. Unless otherwise noted, the years correspond to the time period after the filing of the return. Before the due date, returns are processed as if they were submitted on the due date.
Table 1. Period of Limitations

If You... THEN the period is...

1. Owe additional tax and (2), (3), and (4) do not apply to you.

3 Years

2. Do not report income that you should and it is more than 25% of the gross income shown on your return

6 Years

3. File a fraudulent return.

NO LIMIT

4. Do not file a return.

NO LIMIT

5. File a claim for credit or refund after you filed your return.

The later of 3 years or 2 years after tax was paid.

5. File a claim for credit or refund after you filed your return.

7 years

Property: Keep property records until the statute of limitations for the year in which you sell the property in a taxable transaction ends. When you sell or otherwise dispose of the property, you must retain these documents to determine your foundation for calculating gain or loss.

In most cases, the basis of the property you got in a nontaxable exchange is the same as the basis of the property you gave up. You must preserve records for both the old and new properties until the statute of limitations for the year in which you sell the new property in a taxable transaction ends.

Keeping records for non-tax uses: When your records are no longer required for tax purposes, you should keep them.

Why You Should Keep Record?

Keep records for a variety of purposes. You may need to keep records for insurance or to obtain a loan, in addition to tax considerations. It will assist you if you keep good records:

  • Make a list of revenue sources. Money or property can come from a multitude of places. The sources of your revenue can be seen in your records. To distinguish between taxable and nontaxable income, you’ll need this information.
  • Maintain a record of your expenditures. If you don’t keep track of your expenses as they happen, you can forget about them. You can look over your records to see what costs you can deduct. This will assist you in determining whether or not you are eligible to itemize your deductions on your tax return.
  • Keep note of the property’s foundation. You must retain documents that demonstrate the foundation of your property. This covers the property’s initial purchase price or other base, as well as any renovations you make.
  • Prepare and file tax returns. To prepare your tax return, you’ll need records. You can file more quickly and accurately if you keep good records.
  • On tax returns, there are a variety of elements that provide support. If the IRS has a query about an item on your return, you must retain records. You may be requested to explain the things listed if the IRS investigates your tax return. Good records will assist you in explaining any item and calculating the right tax with the least amount of work. You may have to spend time gathering statements and receipts from numerous sources if you don’t have records. If you are unable to show the right paperwork, you may be required to pay more tax and face penalties.

Kind of Records To Keep

Basic records

Basic records are documentation that should be kept by everyone. These are the documents that show your earnings and spending. If you own a house or have investments, your basic records should include paperwork pertaining to such assets.
Table 2. Proof of Income and Expense

FOR items concerning your... KEEP as basic records...

Income

  • Form(s) W-2
  • Form(s) 1099
  • Bank statements
  • Brokerage statements
  • Form(s) K-1

Expenses

  • Sales slips
  • Invoices
  • Receipts
  • Canceled checks or other proof of payment
  • Written communications from qualified charities

Home

  • Closing statements
  • Purchase and sales invoices
  • Proof of payment
  • Insurance records
  • Receipts for improvement costs

Investments

  • Brokerage statements
  • Mutual fund statements
  • Form(s) 1099
  • Form(s) 2439

The amounts you indicate as income on your tax return are supported by your basic records. Wages, dividends, interest, and partnership or S company distributions are all possible sources of income. Your records can also show that some sums, such as tax-exempt interest, are not taxable.

Keep Copy C of any Form W-2 you get until you start collecting social security payments. This can assist secure your benefits if there is a dispute over your job history or earnings in a given year. Examine the information on your yearly Social Security Statement (for workers over the age of 25).

Expenses

The costs for which you claim a deduction (or credit) on your tax return are documented in your basic records. Alimony, charity contributions, mortgage interest, and real estate taxes are all possible deductions. You may also be able to claim a credit for child care expenditures.

Home

You should be able to establish the basis or adjusted basis of your house using your basic documents. You’ll need this information to figure out if you made a profit or a loss when you sell your house, as well as depreciation if you use part of it for business or rent. The purchase price, settlement or closing charges, and the cost of any upgrades should all be included in your records. They may also reflect any casualty losses that have been subtracted, as well as insurance payments for such losses. If you sold your prior house before May 7, 1997, and paid tax on the gain, you should keep a copy of Form 2119, Sale of Your Home, in your records. When you sell your home, keep track of the sale price as well as any selling costs, such as commissions.

Investments

Your basic records should enable you to determine your basis in an investment and whether you have a gain or loss when you sell it. Investments include stocks, bonds, and mutual funds. Your records should show the purchase price, sales price, and commissions. They may also show any reinvested dividends, stock splits and dividends, load charges, and original issue discount (OID).

Proof of Payment

One of your basic records is proof of payment. You should keep these records to support certain amounts shown on your tax return. Proof of payment alone is not proof that the item claimed on your return is allowable. You also should keep other documents that will help prove that the item is allowable. Generally, you prove payment with a cash receipt, financial account statement, credit card statement, canceled check, or substitute check. If you make payments in cash, you should get a dated and signed receipt showing the amount and the reason for the payment.

If you make payments by electronic funds transfer, you may be able to prove payment with an account statement.

Table 3. Proof of Payment

IF payment is by... THEN the statement must show the...

Cash

  • FAmount
  • Payee's name
  • Transaction date

Check

  • Check number
  • Amount
  • Payee's name
  • Date the check amount was posted to the account by the financial
    institution

Debit or Credit Card

  • Amount charged
  • Payee's name
  • Transaction date

Electronic funds
transfer

  • Amount transferred
  • Payee's name
  • Date the transfer was posted to the account by the financial institution

Payroll deduction

  • Amount
  • Payee code
  • Transaction date

Account statements: You may be able to prove payment with a legible financial account statement prepared by your bank or other financial institution.

Pay statements: You may have deductible expenses withheld from your paycheck, such as union dues or medical insurance premiums. You should keep your year-end or final pay statements as proof of payment of these expenses.

Specific Records

This section is an alphabetical list of some items that require specific records in addition to your basic records.

Alimony

If you receive or pay alimony, you should keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree. If you pay alimony, you also will need to know your former spouse’s social security number.

Business Use of Your Home

You may be able to deduct certain expenses connected with the business use of your home. You should keep
records that show the part of your home that you use for business and the expenses related to that use.

Casualty and Theft Losses

To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. Your records also must be able to support the amount you claim.

For a casualty loss, your records should show:

  • The type of casualty (car accident, fire, storm, etc.) and when it occurred,
  • That the loss was a direct result of the casualty, and
  • That you were the owner of the property.

For a theft loss, your records should show:

  • When you discovered your property was missing,
  • That your property was stolen, and
  • That you were the owner of the property.

Child Care Credit

You must give the name, address, and taxpayer identification number for all persons or organizations that provide care for your child or dependent. You can use Form W-10, Dependent Care Provider’s Identification and Certification, or various other sources to get the information from the care provider. Keep this information with your tax records.

Contributions

You must keep records to prove the contributions you make during the year. The kinds of records depend on whether the contribution is cash, noncash, or out-of-pocket expenses. For information on contributions and the records you must keep, see Publication 526, Charitable Contributions.

Credit for the Elderly or the Disabled

If you are under age 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired. You do not have to file this statement with your Form 1040 or Form 1040A, but you must keep it for your records. If the Department of Veterans Affairs (VA) certifies that you are permanently and totally disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician’s statement you are required to keep.

Education Expenses

If you have the records to prove your expenses, you may be entitled to claim certain tax benefits for your education expenses. You may qualify to exclude from income items such as a qualified scholarship, interest on U.S. savings bonds, or reimbursement from your employer. You also may qualify for certain credits or deductions. You should keep documents, such as transcripts or course descriptions, that show periods of enrollment and canceled checks and receipts that verify amounts you spent on tuition, books, and other educational expenses.

Exemptions

If you are claiming an exemption for your spouse or a dependent (a qualifying child or a qualifying relative), you must keep records that support the deduction.

Exemptions

If you are claiming an exemption for your spouse or a dependent (a qualifying child or a qualifying relative), you must keep records that support the deduction.

Exemptions

If you have employee business expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses, for a discussion of what records to keep.

Energy Incentives

If you want to claim one of the tax incentives for the purchase of energy-efficient products, you must keep records
to prove:

  • When and how you acquired the property,
  • The purchase price of the property, and
  • That the property qualified for the credit.


The following documents may show this information.

  • Purchase and sales invoices.
  • Manufacturer’s certification statement.
  • Canceled checks.

Gambling Winnings and Losses

You must keep an accurate diary of your winnings and losses that includes the:

  • Date and type of gambling activity,
  • Name and address or location of the gambling establishment,
  • Names of other persons present with you at the gambling establishment, and
  • Amount you won or lost

Health Savings Account (HSA) and Medical Savings
Account (MSA)

For each qualified medical expense you pay with a distribution from your HSA or MSA, you must keep a record of the name and address of each person you paid and the amount and date of the payment.

Individual Retirement Arrangements (IRAs)

Keep copies of the following forms and records until all distributions are made from your IRA(s).

Form 5498, IRA Contribution Information, or similar statement received for each year showing contributions you made, distributions you received, and the value of your IRA(s).

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., received for each year you received a distribution.

Form 8606, Nondeductible IRAs, for each year you made a nondeductible contribution to your IRA or received distributions from an IRA if you ever made nondeductible contributions.

For a worksheet you can use to keep a record of yearly contributions and distributions, see Publication 590, Individual Retirement Arrangements (IRAs).

Medical and Dental Expenses

In addition to records you keep of regular medical expenses, you should keep records of transportation expenses that are primarily for and essential to medical care. You can record these expenses in a diary. You should record gas and oil expenses directly related to that transportation. If you do not want to keep records of your actual expenses, you can keep a log of the miles you drive your car for medical purposes and use the standard mileage rate. You should also keep records of any parking fees, tolls, taxi fares, and bus fares.

For information on medical expenses and the standard mileage rate, see Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit).

Mortgage Interest

If you paid mortgage interest of $600 or more, you should receive Form 1098, Mortgage Interest Statement. Keep this form and your mortgage statement and loan information in your records. For information on mortgage interest, see Publication 936, Home Mortgage Interest Deduction.

Moving Expenses

You may be able to deduct qualified moving expenses that are not reimbursed. For more information on what expenses qualify and what records you need, see Publication 521, Moving Expenses.

Pensions and Annuities

Use the worksheet in your tax return instructions to figure the taxable part of your pension or annuity. Keep a copy of the completed worksheet until you fully recover your contributions. For information on pensions and annuities, see Publication 575, Pension and Annuity Income, or Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

Taxes

Form(s) W-2 and Form(s) 1099-R show state income tax withheld from your wages and pensions. You should keep a copy of these forms to prove the amount of state withholding. If you made estimated state income tax payments, you need to keep a copy of the form or your check(s).

You also need to keep copies of your state income tax returns. If you received a refund of state income taxes, the state may send you Form 1099-G, Certain Government Payments.

Keep mortgage statements, tax assessments, or other documents as records of the real estate and personal property taxes you paid.

If you deducted actual state and local general sales taxes instead of using the optional state sales tax tables, you must keep your actual receipts showing general sales taxes paid.

Tips

You must keep a daily record to accurately report your tips on your return. You can use Form 4070A, Employee’s
Daily Record of Tips, which is found in Publication 1244, Employee’s Daily Record of Tips and Report to
Employer, to record your tips.