What Tax Records Should I keep?
WHY SAVE RECORDS?
Once the tax return has been filed, everything is finished and there is no need to use these records again, right? Unfortunately, that perception is very dangerous. There are many reasons for saving tax records -- the main reason is to substantiate the numbers on the tax return.
The statute of limitations for most tax returns is 3 years. This means the IRS, or a state tax authority, can examine or adjust your return any time during the three year period after the due date for it to be filed. If a return is filed late, the 3 year period begins with the filing date. This statute of limitations is a very general guideline to follow. It is often helpful, and sometimes required, to save certain records even longer.
HOW LONG SHOULD DIFFERENT KINDS OF TAX RECORDS BE KEPT?
At minimum, copies of Federal income tax returns should be kept for the 3 prior tax years. Some states require a longer period, and it is often advisable to keep tax return copies 6 to 7 years, especially when they contain information reporting transactions, such as the sale of property, which may affect future years.
Most audits occur within 3 years of the filing of the tax return. Receipts used to document expenses should be kept through the statute of limitations for that return. After that period has expired, the receipts should be examined to see if they fall into one of the areas that need to be saved for a longer period. Receipts that do not need to be kept longer, such as canceled checks, bank statements, and receipts which will not affect future transactions, can be discarded.
If you own a business, you may have records for the sale or purchase of inventory and assets used in the business as well as other operating expenses. After the statute of limitations, you can discard most receipts that deal with operating expenses. Retain any receipts that relate to property you still own to verify the cost for future sales. Payroll records must be retained for a minimum of 4 years.
When your business produces an overall loss on the tax return, this loss is either carried backward or forward depending on the situation. The tax return, the records of the calculation creating the carryover, and the tax return for any year in which part of the carryover loss is absorbed, should be retained for 3 years following the year the loss is finally used.
The most common employee business expenses are transportation and travel expenses. Mileage logs and motel and meal receipts should be kept for the 3 year period. If you are a trucker who claims the standard meal allowance, log books should be retained for the same period.
Closing papers from the purchase or sale of a home should be retained throughout the ownership period, and for a minimum of 3 years after that home is sold. If the home is your personal residence and you defer a gain from the sale by purchasing another residence, the closing papers and the tax return from the year of sale need to be kept for 3 years after the second home is sold.
If you build your own home, or make improvements to a home you purchased, careful records should be kept and retained for at least 3 years after the last home is sold. This includes capital expenditures for building materials, fixtures, and amounts paid to outside contractors.
Year-end brokerage statements from the purchase of stocks, bonds and mutual funds should be retained until 3 years after the investment is sold. These statements will show the reinvestment of dividends, the purchase of shares and the redemption of shares.
IRA contribution and distribution records need to be kept indefinitely. Particularly those records of nondeductible contributions.
If you have received gifts of property other than cash, it is important to find out what the cost to the donor was and obtain receipts to verify the costs. This becomes your cost in the property for future sale.
If you inherit property, you need to keep records that establish the value on the date of death. These records usually come from the estate administrator’s records and should be retained for 3 years after the property is sold.
SUMMARY
While the most common statute of limitations is 3 years from the filing of the return, a return that was never filed has no statute of limitations. The statute of limitations for returns where income has been understated by 25% or more is ten years.
Saving tax records for a minimum of 3 years is essential. Because of the 25% of income rule, keeping records 6 years may be advisable. Saving the tax return copies for an indefinite period can provide good historical information for your own use, in addition to providing substantiation.
If fraud is found to exist in the filing of any tax return, there is no statute of limitations. The IRS may file criminal charges at any time.
This brochure contains general tax information for taxpayers. As each tax situation may be different, this information should not be relied upon as your source of authority. Please seek professional advice for all tax situations.