Tax Records - What You Should Keep And For How Long

Many taxpayers are confused about how long they should keep
tax records. The term "tax records" refers to your tax
returns and the documents that support the information in
the returns. These documents can include receipts, bank
statements, 1099s, etc. If you are one of the unlucky few to
be audited, these records will be vital to fending off the
IRS.

Tax Returns

To protect yourself from a nasty audit, you should keep all
of your tax returns indefinitely. The IRS has been known to
lose or misplace tax returns. While conspiracy advocates
argue that this is evidence of a nefarious scheme, the
simple fact is that the IRS receives millions of returns
over a three-month period and lost returns are inevitable.
So how do you protect yourself? You keep copies of every
single tax return.

A quick word on the IRS e-file program. If you file your
returns electronically, make sure you get copies from the
company that filed your return. All such entities are
required by law to provide you with paper copies.

Records Supporting Tax Returns

You should keep supporting tax records for a period of six
years from the date the returns were actually filed. In
general the IRS only has three years to audit you from the
filing date. For example, if you filed your 2000 tax return
on April 15, 2001, the IRS would have to start an audit by
April 15, 2004. Keep in mind that if you filed an extension,
the IRS will have three years from the date you submitted
the return. As is always case with taxes, there are
exceptions to this general time period.

If your tax return looks like the great American novel, the
running of the three-year audit period may not save you.
Failure to report more than 25% of your gross income gives
the IRS an additional three years to pursue you. Using the
previous example, the IRS would have until April 15, 2007 to
audit your 2000 tax return.

Property Records - Get A Filing Cabinet

You may need to get a filing cabinet if you hold property
for an extended period of time. For example, assume that you
purchased a home in 1980 for $100,000 and made $50,000 in
improvements over the years. You need to keep the purchase
records, mortgage statements and receipts that relate to the
improvements. When you sell the home, you will need the
records to determine the tax consequences of the sale, to
wit, your basis (original cost plus improvements) and
profit. If the IRS decides to take a closer look at the
reported profit, you will need to provide your tax records
to support your claims. Once you actually sell the property,
it is recommended that you keep all of the tax records for
an additional six years.

Divorce

Make sure you keep copies of all of your financial
documents, tax returns and supporting documents if you get
divorced. You should also keep copies of all divorce
agreements and court orders that cover property and
financial issues. When couples divorce, the tax and credit
consequences can be nightmarish. If you don’t keep records,
you will have to ask your ex-spouse for them. Get the
records now to avoid doubling your misery!

Hopefully, you will never need to show your tax records to
the IRS. If you are one of the unlucky few that is audited,
your tax records should keep your feet out of the fire.