Joshua Dietz

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Tax record retention

How Long Should You Keep Tax Records?

This is one of the most common questions I receive, when people learn I work in tax law. 


I understand the frustration. I get it. There are many opinions out there. The IRS tried to help, but unfortunately, their instructions may contribute to the confusion. In this post, I am going to try to help simplify the IRS guidelines and then provide you with an easier “Rule of Thumb” that I use with my clients. 


To start, the IRS plainly states there is no concrete rule for your record retention policy. They say - It depends. 


“The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.” https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records .


The  image  from  the  IRS  website  is  reproduced  in  the  below  image  for  your  reference.

But, what are the periods of limitations for the different situations, actions, expenses, and events, that you  are suppose to record? 


As  you  can  gather  from  the  “it  depends”  comment,  there  are  a  number  of  factors  that  need  to  be  evaluated.  


Originally,  the  IRS  suggests  3  years.  Then,  they  clarify  that  it  is  either  2  years  from  the  date  of  making  a  tax  payment,  or  3  years  from  the  date  of  filing  the  tax  return.  The  choice  depends  upon  the  latest  date  that  triggers  the  deadline.  You have  to  use  the  date  that  occurs  later  in  time.  


Please  understand,  this  suggested  deadline  for  retaining  tax  documents  is  best  applied  for  those  of y’all  that  have  a  very  simple  financial  situation.  Possibly,  an  employee,  with  an  approved  tax  deferred  retirement  plan,  and  a  regular  banking  savings  account  and  checking  account.  If you, however, you receive  income,  and  for  some  reason  forget  to  volunteer  that  information  on  your  tax  return,  your  tax  record  retention  deadline  extends  to  6  years.  


The  silliness  is,  if  you  accidentally  did  not  report  income,  how  are  you  suppose  to  know  if  you  forgot to  report  income?  SURPRISE!!! The  IRS  may  follow  up  with  you  in  that  6  year  window.


If  you  are  a  business  owner,  and  pay  yourself  a  wage,  or  you  hire  employees  to  work  for  you,  you  are  subject  to  holding  your employment  tax  records  for  4  years.  The  IRS  is  extremely  serious  about  collecting  these  taxes. This  is  one  area  you  do  not  want  to  cut  corners.


The  tax  retention  expectation  jumps  to  7 years  if  you  decide  to  loan  a  friend  or  family  member  some  money,  and  they fail  to  repay  it.  (I  think  everyone   has  thIs  happen  to  them  at  one  point  or  another.)  Well,  you  may be  able to  claim  that  as  a  loss  on  your  tax  return!!!  If  you  do  choose  to  claim  that  unpaid  loan  as  bad  debt,  you also  get  to  send  that  person  a  Form  1099,  showing  you  forgave  that  debt  and  they  have  to  count  it  as  income.  Now,  you  have  to  keep  those  records  of  that  bad  loan  for  at  least  7 years.  Or,  what  if  you  invest  based  upon a  hot  stock  tip, and  it  turns  out  to  be  a bad deal? If  you  claim  that  worthless  securities  investment  as  a  loss, y‘all  are  expected  to  hold  those  records  on  that  investment  for  at  least  7 years. 


Once  you  decide  to  start  getting  proactive  in  your  own  financial  well-being,  involving  additional  investments,  like  investing  in  the  stock  market,  real  estate,  art,  cryptocurrency  or  other  investment  property,  the  IRS  advises  the  record  keeping  deadlines  begin  at  the  date  you  sell  those  additional  investments.


(The  image  for  the  following  website  is  reproduced in  the  image  below  for your  reference.https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records )

While  this  information  is  extremely  helpful,  and  confusing,  this  is  not  the  end  of  the  discussion. 


Did  you  know  that  there  is  another  set  of  deadlines  the  IRS  follows?  


Tax  laws  give  the  IRS  an  initial  3  year  window  to  review  your  taxes  and  assess  a  tax  for  you,  if  you  made  a  mistake.  That  3  year  window  is  not  set  in  stone  and  can  be  extended  based  upon  your  circumstances. 


If  the  IRS  assesses  an  additional  tax,  on  your  behalf,  they  have  an  additional  10  years  to  collect  on  that  tax.  Did  you  know  that  10  year  window  can  also  be  extended? (Based  upon  your  individual  circumstances, of  course.)


(Additional  content addressing  IRS  assessment  and  collection  activities  is  too   big  to  address  in  this  post  about  recordkeeping.)  The  laws  are  reproduced  below for  your  reference.  


https://www.law.cornell.edu/uscode/text/26/6501 

Remember,  this  3  year  deadline  for  assessment  can  be  extended.  


In  addition,  here  is  the  law  that  addresses  the  10  year  deadline  the  IRS  has  in  order  to  pursue  collection  activity,  after   they  have  assessed  an  additional  tax.  It  is  reproduced  below  for  your  refefence.


https://www.law.cornell.edu/uscode/text/26/6502

Understand,  tax  and  financial  decisions  have  a  domino  effect,  they  can  impact  you  for  years  to  come.


I  realize  keeping  track  of  all  the  tax  and  financial  records  and  deadlines  can  be  very  complex  and  confusing.  So,  I  try  to  summarize  it  all  for  anyone  who  asks.  I  break  it  down  into  two  main  Rules  of  Thumb.  


My  two  basic  rules  are  as  follows:

I  hope  this  information  has  been  insightfuloe and  beneficial .  If  you  have  any  questions,  please  let  me  know.  


You  may  contact  me  through  the  contacts  section  below.

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Joshua D. Dietz, Tax Counsel

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