I am often asked by clients how long they must keep tax and financial records. Below are some of the key rules about the statute of limitations for US federal returns which can provide some guidance:
1. For most tax returns the statute of limitations is three years from the date the return was filed, including extensions. There are some very important exceptions to this general three year statute of limitation.
2. The statute of limitation never starts if a tax return is fraudulent or if no tax return is filed. This means the IRS can come after you “forever” with regard to that particular tax year.
3. The IRS gets a longer time to come after you with regard to a filed tax return if there is unreported income that exceeds 25% of the gross income shown on the return. In such a case, the IRS has six years from when the return is filed to make a tax assessment.
4. Beginning in 2010, the tax law was amended to extend the statute of limitations to six years if you omit over $5,000 from gross income that is attributable to certain kinds of foreign financial assets. Taxpayers with offshore financial accounts or assets must be particularly diligent in record-keeping.
5. Under other tax rules enacted in 2010, the statute of limitations does not begin to run until the taxpayer has complied with all mandatory foreign reporting requirements. This reporting can include information returns regarding ownership in foreign corporations, foreign partnerships, foreign trusts, information concerning “specified foreign financial assets” and many other transactions in the offshore context. Only when proper reporting is made will the statute of limitations begin. Furthermore, even though the statute starts to run, the entire tax return will remain open for IRS adjustments for a period of three years (rather than only for the portions of the return relating to the foreign reporting that had been missing).
6. A taxpayer who is required to file the FBAR (“Report of Foreign Bank and Financial Accounts” /Form TD F 90–22.1) must keep certain records about the foreign financial account for five years from the due date of the report (June 30 of the year following the year to which the FBAR report relates). Records may need to be maintained for a longer period by persons who have been formally charged with a criminal tax violation.
7. If you are filing an amended return to claim a credit or tax refund, you generally have three years from the date the original return was filed to make the claim, or two years from the date the tax was paid, whichever is later.
In certain cases, record retention beyond the time periods of the statue of limitations will be necessary. For example, it is important to retain supporting documentation for the cost basis for any securities or real estate and any adjustments to basis (e.g., depreciation of real property). Generally, brokerage firms are now required to maintain this information for you, but there may be situations where the brokerage firm is unable to provide such basis information.
State and local statute of limitation rules should also be checked before destroying any tax files since their rules can differ from the federal rules. Often, certain documents should be kept for reasons other than tax. For example, making insurance claims or dealing with a decedent’s assets. Before destroying anything about which you are unsure, please contact Steve Siesser at firstname.lastname@example.org