Tax Records - What You Should Keep And For How Long

By: Richard Chapo

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

Tax Returns

To protect yourself from a nasty audit, you should keep allof your tax returns indefinitely. The IRS has been known tolose or misplace tax returns. While conspiracy advocatesargue that this is evidence of a nefarious scheme, thesimple fact is that the IRS receives millions of returnsover a three-month period and lost returns are inevitable.So how do you protect yourself? You keep copies of everysingle tax return.

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

Records Supporting Tax Returns

You should keep supporting tax records for a period of sixyears from the date the returns were actually filed. Ingeneral the IRS only has three years to audit you from thefiling date. For example, if you filed your 2000 tax returnon April 15, 2001, the IRS would have to start an audit byApril 15, 2004. Keep in mind that if you filed an extension,the IRS will have three years from the date you submittedthe return. As is always case with taxes, there areexceptions to this general time period.

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

Property Records - Get A Filing Cabinet

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

Divorce

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

Hopefully, you will never need to show your tax records tothe 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.