How long should I retain my records?

As you know, the IRS typically has three years to audit returns, but it has six years if it suspects that the return understates income by more than 25 percent.  No statute of limitations applies if fraud is involved or the person fails to file.
To help our clients determine which records to toss and which to keep at the end of the tax season, below is a handy record-retention list, which is based on legal as well as tax considerations.

The IRS is reminding employers about the importance of keeping good records.  The Service notes that payroll and employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate, or the date the tax is paid.  The records should include the following information:

• Employer identification number (EIN)
• Amounts and dates of all wage, annuity, and pension payments
• Amounts of tips reported
• The fair market value of in-kind wages paid
• Names, addresses, Social Security numbers, and occupations of employees and recipients
• Employee copies of Forms W-2 that were returned as undeliverable 
• Dates of employment
• Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers
• Copies of employees' and recipients' income tax withholding allowance certificates
• Dates and amounts of tax deposits
• Copies of returns filed
• Documentation for allocated tips
• Documentation for fringe benefits provided, including substantiation

A willfull failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year.