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Which Tax Records Do You Need To Keep?

The IRS has its rules on what you need to keep and what you can throw out when it comes to receipts, tax records, and accounting records. First, it's good to start with the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that time period has passed, the IRS is legally barred from even asking you questions about those returns.

The concept underlying the statute of limitations is that after a period of years, records are lost or misplaced, and memory isn't as clear. There's a need for conclusion. Once the statute of limitations has passed, the IRS can't go after you for additional taxes, however, you can't go after the IRS for additional refunds, either.

The Three-Year Rule

For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:

  • If you file a "fraudulent" return or don't file at all, the limitations period doesn't apply. In fact, the IRS can pursue you at any time.
  • If you don't report all of your income, and the unreported amount is more than 25 percent of the gross income actually shown on your return, the statute of limitations  period is extended to six years.
  • If you've claimed a loss from a worthless security, the limitation period is extended to seven years.
  • If you're deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS substantiation of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.

Assuming that you've filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.

Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.

Here's a checklist of the documents you should hold on to:

  1. Capital gains and losses. The gain from the sale of your capital assets are reduced by your basis (contact us if you don't know how to calculate your basis). You'll need to keep the records as it relates to your basis calculation in the securities and/or business property that you sell. Keep those records for at least three years after you file the return reporting their sales.
  2. Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It's just good practice, even though most homeowners won't face any tax problems. That's because profit of less than $250,000 on your home ($500,000 on a joint return) isn't subject to capital gains tax.If the profit is more than $250,000 ($500,000 joint filers) or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue, but of course, it's better to be safe than sorry.
  3. Business records. Business records can become a nightmare but you'll need to keep most of them. Digital copies suffice so try to at least keep a digital record of all your transactions.
  4. Employment, bank, and brokerage statements. Keep all your W-2s, 1099s, brokerage statements, and bank statements to prove income until three years after you file. Also, keep checks, receipts, mileage logs, tax diaries, and other documentation that substantiate your expenses. These all come in handy (if not required) during IRS tax audits.
  5. Tax returns. Keep copies of your tax returns as well. You can't rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for six years. 
  6. Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're wrong, you'll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don't dispose of those records until after you've validated those contributions.

 

Contact us by phone or email if you have any questions about which tax and financial records you need to keep this year.

CPA, Deductions, IRSZev Jankovic