Tax Records - What You Should Keep And For How Long

Many taxpayers are confused about how long they should keep tax records. The term "tax records" refers to your tax returns and the documents that support the information in the returns. These documents can include receipts, bank statements, 1TO2s, etc. If you are one of the unlucky few to be audited, these records will be vital to fending off the Tax Authorities.




Tax Returns

To protect yourself from a nasty audit, you should keep all of your tax returns indefinitely. The Tax Authorities has been known to lose or misplace tax returns. While conspiracy advocates argue that this is evidence of a nefarious scheme, the simple fact is that the Tax Authorities receives millions of returns over a three-month period and lost returns are inevitable. So how do you protect yourself? You keep copies of every single tax return.

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

Records Supporting Tax Returns

You should keep supporting tax records for a period of seven (7) years from the date the returns were actually filed. In general the Tax Authorities only has six years to audit you from the filing date. For example, if you filed your 2000 tax return on April 15, 2001, the Tax Authorities would have to start an audit by April 15, 2007. Keep in mind that if you filed an extension, the Tax Authorities will have six years from the date you submitted the return. As is always case with taxes, there are exceptions to this general time period.

Property Records - Get A Filing Cabinet

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

Divorce

Make sure you keep copies of all of your financial documents, tax returns and supporting documents if you get divorced. You should also keep copies of all divorce agreements and court orders that cover property and financial issues. When couples divorce, the tax and credit consequences can be nightmarish. If you don't keep records, you will have to ask your ex-spouse for them. Get the records now to avoid doubling your misery!

Hopefully, you will never need to show your tax records to the Tax Authorities. If you are one of the unlucky few that is audited, your tax records should keep your feet out of the fire.