How Long Should I Retain My Tax Records?
Basic Tax Records Are Documents That Everybody Should Keep
Co-Author – Kevin Hargnett, Deluzio and Company, Staff II Accountant
When it comes to taxes, the supporting material is even more important because the IRS could come back years later with questions. You may have to produce those records if IRS (or a state or local taxing authority) audits your return or seeks to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.
Keep returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). If you file your return late, IRS generally 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, IRS can assess tax at any time (even beyond three or six years). If IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did. While it’s impossible to be completely sure that IRS won’t at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate.
Records relating to property may have to be kept longer. The tax consequences of a transaction that occurs this year, such as a sale of property, may depend on events that happened years ago. The period for which you should retain records must be measured from the
year in which the tax consequences actually occur. Therefore, those records should be kept until at least six years after you file your return for the year of sale. Similar considerations apply to other property that is likely to be bought and sold-for example, stock in a business corporation or in a mutual fund, bonds (or other debt securities), etc.
In case of separation or divorce. If separation or divorce becomes a possibility, be sure you have access to any tax records affecting you that are kept by your spouse. Or better still, make copies of the tax records, since relations may become strained and access to the records may be difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse.
Electronic record storage. You may keep your records in electronic form instead of or in addition to keeping paper copies. The periods for which the records should be kept are the same as for paper records. If your tax records are stored on your computer’s hard drive, you should back it up to an external storage device or on paper.
Loss or destruction of records. To safeguard your records against loss from theft, fire or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency. If, in spite of your precautions, records are lost or destroyed, it may be possible to reconstruct some of them. For example, a paid tax return preparer is required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared.
More details on tax record keeping are available in IRS Publication 552, Recordkeeping for Individuals.Source: pittsburghcpafirm.com