Tax season is here! As people begin shuffling through their current year receipts, they often will ask “how long should I keep my records?” The answer to that question is really “it depends”. You will want to keep copies of your filed tax returns indefinitely. They help in preparing future returns and making certain computations if you have to later file an amended tax return. They could also be helpful to your survivor or the executor, or administrator of your estate. If you file your returns electronically, be sure to get copies from the company that prepared and filed your return.
In general, the IRS can only assess tax for a given year within three years after that return was filed or the tax was due (whichever is later). For example, if your 2012 individual income tax return is filed by its original due date of April 15, 2013, the IRS will have until April 15, 2016 to assess a tax deficiency against you. If you file your return late, they will have three years from the date you filed the return to assess a deficiency.
However, the three-year rule isn’t ironclad. The assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, where no return was filed for a tax year, the IRS can assess a tax at any time (even beyond three or six years). If the IRS claims that you never filed a return for a particular year, keeping a copy of the return, and proof of mailing or efiling, will prove that you did. If you do not file a return, or file a fraudulent return, there is no limit to the time period of an IRS assessment. In this extreme case, records should be kept indefinitely.
While it is impossible to be completely sure that the IRS won’t, at some point, seek to assess tax, retaining important tax records for six years after your return is filed should, as a practical matter, be adequate.
Records relating to property may have to be kept longer. Keep in mind that the tax consequences of transactions that occur in one year may depend on things that happened in earlier years, and the time period for which you should retain records must be measured from those earlier years. For example, you bought the home in 1985 for $100,000 and made $25,000 of capital improvements in 1995. To determine the tax consequences of the sale, it is necessary to know your basis (i.e. the original cost plus later capital improvements). Now suppose you sell your home in 2012 for $500,000 and in a subsequent year your return gets audited. You will have to produce records relating to the original purchase in 1985 and the subsequent improvement in 1995 to be able to show what the basis is.
Similar considerations apply to other property which is likely to be bought and sold – for example, stock in a corporation, mutual fund, bond, etc. In particular, remember that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase. The records should be kept for at least six years after the stock is sold that reports the sale.
Additionally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as the new property, until the period of limitations expires for the year, in which you dispose of the new property in a taxable sale or disposition.
So what are the basic records to keep? These are the documents to prove your income and expenses reported on your tax return. Some examples of items of documenting income to keep are: Forms W-2, Forms 1099, Bank statements, Brokerage statements, and Forms K-1. Examples of items documenting expenses are: Sales receipts, Invoices, Cancelled checks or other proof of payment, and Written communications from qualified charities.
Confused? If you would like further explanation of the recordkeeping rules, or have questions on your specific recordkeeping, please contact Andrew D. Ross, CPA of Bedard, Kurowicki & Co., CPA’s at (908) 782-7900 x 113 or email firstname.lastname@example.org.