Out with the Old and In with the New!

Jenny Kramer, CPA, Tax Senior Manager  email
December 2011



As we get ready for 2012, it is once again time to pack away another year. With our lives getting more and more cluttered and space at a premium, our focus shifts to which records do we need to keep for yet another year and which can be discarded as we make room for our new 2012 files?  The following is a guide that outlines recommended minimum retention time periods for various records. Keep in mind that these are suggestions, and there may be extenuating circumstances, such as pending or potential litigation or industry specific requirements, that may require you to lengthen these record retention periods. 

A common misconception in reference to tax record retention is that retaining records through the typical three-year statute of limitations period is sufficient. However, for several reasons, tax return filings, tax return mail receipts, cancelled checks or other tax payment documentation, correspondence and revenue agent reports are all documents which should be maintained permanently. There are actually several differing statute of limitations that could apply to a tax return. In a typical situation, the Internal Revenue Service (IRS) would have three years to audit your filing and whichever states you file in have their own statute of limitations often different from those of the IRS. In addition, the IRS can actually go back up to six years if the IRS finds that the taxpayer has under-reported income by 25 percent or more from the income shown on the filed tax return. Also, there is no statute of limitations in the event of a civil fraud or failure-to-file case, and these issues could be brought up by the IRS at any time in the future. Worse yet, in the event of a failure-to-file case, the IRS does NOT have the burden of proving that no tax return was filed; therefore the burden of proof falls on the taxpayer to prove that they did, in fact, file a tax return. 

Beyond the tax return, there are additional reasons to maintain certain tax related documentation permanently. Formation documents, by-laws and elections should be permanently maintained as evidence of proper set-up.   It is also important to maintain records connected with capitalized assets, such as depreciation, depletion and amortization schedules, as well as property appraisals for basis tracking purposes which may span over several years. To further complicate matters, if you receive property in a nontaxable exchange, you must retain records of the old property as well as the new property. As you can see, adequate record retention goes well beyond the typical three-year statute of limitations.     

The start of a new year is a good time to review and update your record retention policies. In today's electronic environment, there are applications and tools available to assist in making record retention and disposition of documents an automated process. Appropriate backup storage and disaster recovery policies should also be considered as part of the review of your record retention policy.  As the IRS and state departments of revenue become increasingly aggressive, it is crucial that the right information be maintained in order to be protected from potential tax challenges. If you have questions regarding document retention or disposition, please contact your Kolb+Co. business adviser.