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September 2016 Tip of the Month

Can We Toss It?

Despite the advent of computers and the possibility of storing tens of thousands of document on CDs, flashdrives or the cloud, most businesses and individuals still maintain significant amounts of paper records. Besides the clutter at home that your spouse or business partner may complain to you about, there are often direct and indirect costs associated with holding on to these documents.

Here are some hints on what financial papers and documents you need to keep and what you can throw out.

Let's start with your "safety zone," the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.

The concept behind it is that after a period of years, records are lost or misplaced, and memory isn't as accurate as we would hope. There's a need for finality. Once the statute of limitations has expired, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.

The Three-Year Rule

For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:

  • If you don't report all your income, and the unreported amount is more than 25 percent of the gross income actually shown on your return, the limitation period is six years.
  • If you've claimed a loss from a worthless security, the limitation period is extended to seven years.
  • If you file a "fraudulent" return or don't file at all, the limitations period doesn't apply. In fact, the IRS can go after you at any time.
  • If you're deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.

Assuming that you've filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.

Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.

Here's a checklist of the documents you should hold on to:


Capital gains and losses. Your gain is reduced by your basis - your cost (including all commissions) plus, with mutual funds, any reinvested dividends, and capital gains. But you may have bought that stock five years ago, and you've been reinvesting those dividends and capital gains over the last decade. And don't forget those stock splits.

You don't ever want to throw these records away until after you sell the securities. And then if you're audited, you'll have to prove those numbers. Therefore, you'll need to keep those records for at least three years after you file the return reporting their sales.


Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It's just good practice, even though most homeowners won't face any tax problems. That's because profit of less than $250,000 on your home ($500,000 on a joint return) isn't subject to capital gains tax.

If the profit is more than $250,000 ($500,000 joint filers) or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue, but of course, it's better to be safe than sorry.


Employment, bank, and brokerage statements. Keep all your W-2s, 1099s, brokerage, and bank statements to prove income until three years after you file. And don't even think about dumping checks, receipts, mileage logs, tax diaries, and other documentation that substantiate your expenses.


Tax returns. Keep copies of your tax returns as well. You can't rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for at least six years. The bottom line is that you've got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.


Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're wrong, you'll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don't dispose of those records until after you've validated those contributions.

And how About Your Business?

It is in every business owner's interest to establish a record retention schedule as part of records management, and to regularly cull records to minimize storage needs. Various Federal agencies have established record retention guidelines that are published in the Federal Register, but there is no comprehensive record retention standard. Here, however, is a guideline you might find useful:

Permanent- Corporate charter and by-laws, stock and bond records, corporate minutes, trademarks, patents and copyrights, licenses and permits, legal correspondence, deeds and mortgages, tax returns, worksheets and IRS correspondence relating to tax liability, accounting records (financial statements, auditor's reports, general ledgers and year-end trial balances, depreciation records, property appraisals, cancelled checks for major items).

Seven Years- Settled accident reports and claims, bills of lading, expired contracts and leases, employee personnel records subsequent to termination, employment and sales tax returns, accounting records (accounts and notes receivable and payable ledgers, automobile logs, bank statements and cancelled checks, cash receipts and payments and general journals, commission records, expense reports, inventory records, purchase orders and invoices, purchase journals and voucher registers, sales invoices and sales registers or journals, payroll records, cancelled stock and bond certificates, royalty records).

Three Years- Expired insurance policies, general correspondence, internal audit reports and workpapers, accounting records (bank reconciliation and bank deposit slips, petty cash vouchers, physical inventory tags).

One Year- Employment applications, secretarial notebooks, internal control documents such as stockroom withdrawal forms, duplicate copies of purchase order.