When determining how long to keep most of your income tax records, we look to the time frame that the IRS or state revenue agency can audit a tax return. The IRS can audit a return for three years from the original or extended due date. Minnesota Revenue adds an additional six months to the audit period meaning the state can audit a return three and one-half years from the original or extended due date. As an example, if your 2018 form 1040 was filed by April 17, 2019, the state of Minnesota has until October 15th of 2022 to assess a deficiency on the return.
However, if your return has a substantial understatement of income (which is defined as not reporting more than 25% of the gross income amount) the statute of limitation period is extended an additional three years to a total of six years and the state gets an additional six months (total of six and one-half years).
To be safe, we would recommend that you hold the records for seven years from the due date of the return to cover the possibility of the extended statute of limitations period.
There are certain records that should be kept much longer or permanently. For example, records substantiating the cost basis or property should be kept for a period of seven additional years from the date of sale of the property. There are also many documents you should retain permanently such as old tax returns, financial statements, depreciation schedules.
There are also non-tax reasons to keep documents permanently such as corporate or business documents, trademark registrations, property deeds, mortgages, bills of sale and insurance policies.
Records can be stored electronically, so go ahead and scan in the old paper documents to save space. Be sure your home network security is up to date and your documents are password protected. We also suggest you regularly back-up to electronic storage that is not continuously connected to a device with internet access, as intruders can access and hold hostage files saved to an external hard drive that is connected to your computer. Better yet, back-up your files to a third-party cloud service with strong security measures to prevent cyber-attackers from reaching your data and to protect your documents from natural disasters.
If you have questions regarding your situation, please contact John Csargo, CPA, MBT, CFP at email@example.com with any questions.