How long should you keep copies of tax returns
Taxpayers often wonder how long to keep records of tax returns and supporting documents.
Not only should the actual tax return be kept, but all receipts, canceled checks or other proof of payment to support any deduction or credit that is claimed on the tax return should as well. The type of records to keep is any record to support the deduction or credit on a tax return.
Proof of payment is one of the basic records to keep. However, proof of payment alone is not proof that the item claimed on the tax return is allowable.
If claiming mileage for example, a business, medical, charitable or moving purpose must be supported also to claim the deduction. Generally, a taxpayer proves payment with a cash receipt, financial account statement, credit card statement, or cancelled check. If payments are made in cash, a signed and dated receipt showing the amount and the reason for the payment will suffice.
Tax returns and records to support deductions or credits should be kept a minimum of five years. The IRS can go back three years to audit a tax return and may examine further back if a pattern of unallowable deductions or credits is found in the original audit.
Keeping all documentation to support deductions can save the taxpayer a lot of headache if a return is selected for an audit. Getting proof of payments can be difficult after a return is selected for an audit and three or more years have passed since the taxpayer filed the return.
Electronic copies of documents are allowed
during examination of a tax return. If a taxpayer scans and stores the images on a computer, this type of storage is acceptable by the IRS. As long as the documents are readable, legible, and show the proof of the deduction, the IRS will accept copies of electronically stored documents. Another component is that the electronically stored data must be able to be retrieved and printed to a hard copy if requested by the IRS. Electronic storage methods can help with storage space issues. However, backing up the data and securing it is important.
Documents that show basis in investments such as stocks should be kept as long as the investment is held. The records to keep should enable a taxpayer to determine the basis of the investment to show either a gain or loss when the investment is sold. The records should show purchase price, sales price, and commissions. In addition if there are reinvested dividends, stock splits or other activities that may increase or decrease the basis of the investment, these should also be kept.
There may be certain tax returns and documentation that need to be saved further back than five years. If a taxpayer has rental property, the tax returns involving the activities of the property can be helpful when the property is sold for determining the basis. Documentation pertaining to business partners or officers should be kept for as long as the business is operational.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at email@example.com.Source: www.standard.net