Taxpayers who are subject to the federal income tax or who are required to file information returns with the Internal Revenue Service, must keep accurate records. In the event your return is audited, the auditor will expect you to substantiate the revenue and expenses reported on the return with proper accounting documentation. Generally, no penalty is imposed for failure to keep the required records. However, in case of a dispute with the IRS, the burden of proof is on the taxpayer. Incomplete or nonexistent records may result in interest, penalties and loss of legitimate deductions.
This guide provides suggested retention times for specific types of records. It is prepared based on information published by the American Institute of Certified Public Accountants. However, it is not all inclusive. For questions about specific applications, contact our office.
Seven Years **
Three Years **
Two Years **
Other Misc. Records
1. Real and Personal Property – Three years beyond the time the property is in use.
2. Passive Losses – If a taxpayer is unable to currently deduct a loss from a passive activity, they are permitted to carry forward the loss indefinitely until the loss is used to offset passive income or the passive activity is disposed of in a taxable transaction. Carry forward losses are computed on worksheets provided by the IRS and these worksheets should be retained until at least three years after the carry forward losses are used.
3. Nondeductible IRA Contributions – Taxpayers who make non-deductible IRA contributions are required by the IRS to retain all the tax records that pertain to such contributions until the taxpayer’s IRA’s are fully distributed. these records include form 8606, Forms 1040 or 1040A, Form 5498 and forms 1099-R or W-2P.
4. Principal Residence – Records verifying a taxpayer’s basis in his or her principal residence must be kept until he or she is sure they will no longer be an issue. Such records pertain to original cost, capital improvements and Form 2119 – Sale or Exchange of Principal Residence.
** Retention time is measured from the later of tax return due date or filing date, plus any amendment or extension date