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Tax Records - What You Should Keep And For How Long
By: Richard Chapo
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.
About the Author:
Richard Chapo is CEO of http://www.businesstaxrecovery.com
- Obtaining tax
refunds for businesses by finding overlooked tax deductions and credits through
a free tax return review. |
