Minnesota Estate Planning Lawyer Talks About the Issues Related to Keeping Tax Records
There are many reasons for retaining tax records. They can be a useful guide for business planning, for tracking receipts and expenses, and in cases where the company or shares are being sold to outside parties.
The IRS expects taxpayers to keep records for as long as they are needed to administer any part of the Internal Revenue Code. In other words, if you fail to keep records, and an item in a past return is questioned, you may not have the documentation you need to defend yourself and avoid taxes and penalties. In addition, insurance companies and creditors may wish to see tax returns even after the IRS no longer does.
What is the “Period of Limitations” for a Tax Return?
Generally, you must keep records that support income and deductions for a tax return until the “period of limitations” for that return elapses. This is the period during which you can still amend your return to get a refund or credit and during which the IRS can still assess more tax. It varies depending on the circumstances surrounding each return.
- If you owe additional tax, but you haven’t seriously underpaid, committed fraud, or failed to file a return, the period is 3 years from the date taxes were filed.
- If you failed to report income that you should have reported, in excess of 25% of the gross income that you did report, the period is 6 years.
- If you filed a claim for credit or refund after you filed your return, the period is the later of 3 years after the return was filed or 2 years after tax was paid.
- If you filed a claim for a loss from worthless securities or a bad debt deduction, the period is 7 years.
- If you filed a fraudulent return or failed to file a return, the period is unlimited.
Note: Returns filed before taxes are due are treated as though they were filed on the due date.
Other Periods of Limitations
Additionally, if you are an employer, you must keep employee tax records for at least 4 years after the later of the date the tax becomes due or the date it is paid.
For assets, you should keep records until the period of limitations elapses for the year in which you sell the property in a taxable transaction. You will need records to compute depreciation, amortization, or depletion deductions and to add up your basis in the property for purposes of calculating gain or loss. A business law attorney experienced in tax matters can further guide you in relation to your specific situation