Ask the Probate Judge—Time to Keep Records
Rudd, appeared September 11, 2003, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: How long should I keep tax records, receipts, and returns? Do the same rules apply to both federal and state returns? What about New Mexico gross receipts tax records? What about probate court paperwork?
The classic legal answer is "it depends." The time periods you refer to are called "statutes of limitation" (SOL). Once a statute of limitation expires, tax cannot be assessed even if you owe it.
The general rule for federal tax returns is that the IRS must assess a tax "within 3 years after the return was filed." For a 1999 tax return, which was filed by April 15, 2000, the three-year SOL expires at midnight on April 15, 2003. The IRS must have assessed any taxes owed in 1999 by April 15, 2003. If you file before April 15, the SOL runs from the date the tax is due. If you file after April 15, the SOL runs from the date the return was filed. For 2002 returns, which were filed by April 15, 2003, the SOL expires at midnight on April 15, 2006.
If you omit more than 25% of the amount of gross income stated in an income, estate, or gift tax return, tax can be assessed at any time within six years after the return was filed. If you (1) file a false or fraudulent return with the intent to evade tax; (2) make a willful attempt to defeat or evade tax; or (3) fail to file a return altogether, there is no SOL. The IRS can assess tax, penalties, and interest against you at any time. If you destroyed your records, you will have an even harder time proving you do not owe the tax.
New Mexico has different rules. The New Mexico Tax and Revenue Department cannot assess tax on you "after three years from the end of the calendar year in which payment of the tax was due." This means the SOL for 1999 state tax returns expires at midnight on December 31, 2003.
Various exceptions to this state rule apply. For false or fraudulent returns with the intent to evade tax, the SOL is ten years; for failure to file a return seven years; and understating by more than 25% the amount of tax liability six years. These time limits apply to both state income taxes and gross receipts taxes.
Regarding court paperwork, once an estate is closed, keep all probate paperwork at least one year after the closing statement is filed. Some personal representatives like to keep certain records forever, especially those relating to the basis of property and other long-term matters. Courts are required to keep case records in perpetuity, so you should be able to get copies of court paperwork if the need arises. Keep receipts for estate expenditures the same amount of time as tax records in case the IRS audits an estate for estate taxes.
In summary, to be safe taxpayers and personal representatives should keep tax records, receipts, returns, and probate income/expense documentation at least three years and up to six years or more.