I am in the process of emptying out file cabinets and sending stuff to be shredded. I have had a small business for several decades. What are the current rules as far as keeping supporting documents for Federal and state returns. Can I safely discard after seven years? I have had several different answers. Thanks

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Originally posted by ZSMICHAEL:
I am in the process of emptying out file cabinets and sending stuff to be shredded. I have had a small business for several decades. What are the current rules as far as keeping supporting documents for Federal and state returns. Can I safely discard after seven years? I have had several different answers. Thanks

Hmmm. Not a CPA. There are a few different timelines, and from recollection seven years is the second longest in most cases. The longer one is forever if fraud is alleged. As long as everything is clean and tidy...

Hmmm, asked the google and the first response was the IRS:

https://www.irs.gov/businesses...hould-i-keep-records

Period of Limitations that apply to income tax returns
Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.

Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.

Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.

Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.

Keep records indefinitely if you do not file a return.

Keep records indefinitely if you file a fraudulent return.

Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?
Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

I am a CPA (inactive) but not a tax specialist. Moreover, I’ve learned to run or otherwise look busy when someone asks about record retention!

The above post provides some good general guidance. Companies struggle with this issue and the answer is partially influenced by your degree of risk tolerance.

I recall having to deal with the old records of a large subsidiary that we had sold. Unfortunately, we sold the business assets - not the legal entities - and thus the buyer left those old records for us to deal with. I forget the details. Multiple locations were involved and so was urine from the security dogs used at some of those 3rd party sites!

You might look into electronic archival but you’d need to consider the future obsolescence of a chosen file format. But, you should first consult with someone actively in the business. Posing a question here is an indirect form of research. Good luck.

7-10yrs generally as told by my EA (Enrolled Agent)

Of course the variables will be the type of business you're in and if there's been any audits in the past.

If you have had a loss carry forward used in a year under audit, IRS will ask for records back to the original loss year. I resolved a client audit for 2012 & 2013, then in 2017 IRS audited 2015 & 2016. 2015 had a loss carry forward from 2013 & they wanted to re-audit 2013. I had to tell the audit supervisor that my client would see their ass in Federal Court if they continued the illegal request. Due to identity theft I had a tax client have to prove it was not his income from 7 years back. I am now in the process of shredding client records prior to 2014. I keep my personal records for 10 years after filing, & recommend that to all clients. Keep all records of IRA's, mutual fund & stock investments, home purchases, home sales, life insurance policy's, Etc. until at least 10 years after final sale or disposition (tax laws change over time). I will not go into detail as to why, but a client had a copy of a 40 year old Life Insurance policy that saved him $1000's in taxes. Currently I am trying to resolve a client IRS problem from 2002 thru 2006.

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If you have had a loss carry forward used in a year under audit, IRS will ask for records back to the original loss year. I resolved a client audit for 2012 & 2013, then in 2017 IRS audited 2015 & 2016. 2015 had a loss carry forward from 2013 & they wanted to re-audit 2013. I had to tell the audit supervisor that my client would see their ass in Federal Court if they continued the illegal request. Due to identity theft I had a tax client have to prove it was not his income from 7 years back. I am now in the process of shredding client records prior to 2014. I keep my personal records for 10 years after filing, & recommend that to all clients. Keep all records of IRA's, mutual fund & stock investments, home purchases, home sales, life insurance policy's, Etc. until at least 10 years after final sale or disposition (tax laws change over time). I will not go into detail as to why, but a client had a copy of a 40 year old Life Insurance policy that saved him $1000's in taxes. Currently I am trying to resolve a client IRS problem from 2002 thru 200

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Thank you. I was hoping you would respond. I have had some crazy stuff happen with the IRS over the years. My records include past stock transactions as well as retirement accounts etc. The ten year rule makes sense to me. Appreciate the time all of you took to post.

I would like to add; some states do not have a statute of limitations on tax debt. A client came to me in 2017 after receiving tax due for non-filing in California for the year 2000. She had moved to Australia in 1999 from California working for the same company in Australia. In 2016 she moved back to the US & I did her 2016 tax return. CA then got her information from IRS. Her employer had incorrectly reported her address as in California instead of Australia. 15 years later we had to prove she was not living in the US during 2000.

Thanks for the additional tip. Mississippi has had consistent fumbles in paying me a tax refund and then demanding an overpayment plus interest. Always fun running a business.

IRA’s can be more complicated than described. Depends on the type IRA and the type of your contributions to the IRA. If a traditional (or rollover) IRA and your contributions were all pretax dollars, then all of the later distributions will be taxable at ordinary rates. Thus you don’t need to retain records of your investment transactions within the account, etc. But if you had some aftertax contributions, you’ll need to retain that historic documentation.

And accounting aside, you should speak with your attorney as to other documents that may be needed. The overall issue re records retention is far broader than accounting.

Lastly, free professional advice from the internet is worth what it costs.

The advice to keep records indefinitely if you file a fraudulent return is hilarious.

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And accounting aside, you should speak with your attorney as to other documents that may be needed. The overall issue re records retention is far broader than accounting.

Lastly, free professional advice from the internet is worth what it costs

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You are quite right. I was only looking for a general guideline and Anush provided that. Thanks for the feedback.

Yes, on IRA's where after tax contributions have been made, I have had to go back 20 plus years to compute the total of the after tax contributions made in order to allow the distributions to be partially tax free. Fortunately, the client had his returns going back to the beginning of the after tax contributions.

My recommendation to clients is keep the source documents going back 7 years and keep the return copies indefinitely.

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Originally posted by Palm:
The advice to keep records indefinitely if you file a fraudulent return is hilarious.

Basically, they are saying that you’re &&&&&& in that situation regardless of your records!

Fun family story. My grandma was a pack rat. Not necessarily a hoarder but she did keep her tax returns for every year of her adult life. If we had not found her 1940s tax returns when cleaning out her home making it ready to rent after she passed away about ~10 years ago, we would never have found out my grandfather was paying child support to another woman and that my dad had a 1/2 brother that’s about 6 years older than him that we eventually tracked down. 70+ years late, they finally got to meet face to face last year and they talk at least weekly.

So there’s important data in those returns for your grandkids!

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That was a good one. A friend of mine was pregnant when she married. Her mother harped on her constantly about how shameful that was. After her mother died, she was going through papers in the attic and discovered her mother had another child out of wedlock, that she had placed for adoption. The irony and secrets people keep!