Document Retention: How Long is Enough?3/10/2017 | By: David N. Milner, Esq. | GDB 2017 Spring Newsletter
Clients often ask “For how long should I retain my records?” Unfortunately, there is no finite answer to this question. Typically the need for retaining records is to support a position in the event it is challenged. The best answer is that records should only be destroyed when you are certain there will be no reason to produce them in the future.
With respect to tax and most contract matters, conventional wisdom is that records should be retained for six years. With respect to income tax matters this standard is based on the time period given to the IRS to challenge positions taken on your income tax returns. While the period during which the IRS may assess additional income tax is generally three years, if the Internal Revenue Service can establish that there was an omission of income equal to or greater than 25% of the gross income that was reported, a six-year statute of limitations will apply. It is important to remember that the statute runs from the time the return is filed. For example, for the 2016 year, if you obtain an extension for filing your return and do not file your return until October 15, 2017, then applying the “standard” six-year statute, you should retain any back-up documentation supporting positions taken on your 2016 return until at least October 15, 2023.
However, it is best to retain records for as long as possible. For example:
When you sell your residence, you will need to establish the tax basis of your residence (i.e., generally its original cost plus the cost of any permanent improvements) for purposes of determining gain or loss. This is true regardless of how long ago the residence was acquired.
The same is true for securities you sell. You will need to establish your tax basis in the securities, no matter how long ago you acquired them. In addition to retaining records supporting what you paid for the security, you should also retain records showing any stock dividends, stock-splits or shares acquired through dividend reinvestment programs since these may affect your tax basis. While financial institutions generally maintain these records, the burden remains on you. Further, if you move your accounts from one financial institution to another, the basis information may not necessarily follow.
For assets that you acquire by gift, you will need to establish the cost basis of the assets in the hands of the donor in order to determine if you have sold the asset for a gain or a loss. For assets you inherit, you need to establish the fair market value of the asset on the date of decedent’s death (or its value up to six months later if the decedent’s executor elects to use the alternative valuation method for purposes of valuing the decedent’s estate) in order to determine gain or loss on the sale of the asset.
Similarly, equipment and real property used in a trade or business must be depreciated using guidelines established by the IRS. Regardless of when the property was acquired, the tax basis of the asset being depreciated must be established.
With respect to contract claims, the six year measuring period does not start until there is a breach of the contract. The measuring period may restart if there is a partial payment or partial performance of the contract after the breach occurs. There can also be other situations when the beginning of the measuring period is not necessarily the day upon which you allegedly first breached the particular agreement.
For these reasons as well as many others, records should only be destroyed when you are certain you will not be required to produce them. The use of modern technology may help since records can be scanned and the images retained electronically. However, relying upon digital records can present problems of accessibility, including the difficulty for others to access your records if you become incapacitated or after you have died. These issues are discussed in an Article that appeared in the Winter 2016 issue of this Newsletter.