Papers, papers and still more papers. When can I destroy these documents?

There are no hard and fast rules in this area. The following offers some general guidance to carefully consider when determining any destruction of documents.

Against the urge to purge, remember that maintaining documents and records is often essential if a tax audit by the IRS, state or local taxing authority occurs. Be aware that it is the burden of the taxpayer to provide sufficient proof and support for any tax position taken on a tax return. Prematurely disposing of relevant documentation and proof supporting a tax deduction or tax position could have a disastrous tax impact.

Tax rules offer some guidance as to minimum document retention periods. It is imperative to keep records such as receipts, canceled checks, and other documents that support an item of income or a deduction, or a credit appearing on a return until the statute of limitations expires for that return.

For most federal returns, the statute of limitations is three years from the date you filed the return. However, the following are some very important exceptions to this three-year statute of limitation:

• There is no period of limitations to assess tax when a return is fraudulent or when no return is filed.

• If income that you should have reported is not reported, and it is more than 25 percent of the gross income shown on the return, the time to assess is six years from when the return is filed.

• For filing a claim for credit or refund, the period to make the claim generally is three years from the date the original return was filed, or two years from the date the tax was paid, whichever is later.

• For filing a claim for a loss from worthless securities the time to make the claim is seven years from the date the return was due.

• If you are an employer, you must keep all of your employment tax records for at least four years after the tax becomes due or is paid, whichever is later.

Additionally, it is often imperative to check state and local statute of limitation rules before destroying files and records.

Keep in mind that documents may need to be retained and preserved for legal reasons other than taxation, such as insurance claims or facilitating the transfer of assets in the case of deceased family member. Documents like death certificates, estate tax closing letters should be kept indefinitely.

It’s important that taxpayers talk with their tax attorney and tax accountant before destroying any documents or files.

 

Steven J. Fromm, LL.M., is an estate planning, tax and probate attorney and blogger in Philadelphia. You can find more information on this topic and others on his blog.