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.
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.
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.